All the Numbers

Tax withheld from pay, and the April refund

From the All the Numbers wiki · Tax

Income tax is paid as the year goes, not at the end. An employer withholds tax, CPP and EI from each paycheque and sends it to CRA. After the year ends, the return works out the actual tax; if more was withheld than owed, CRA refunds the difference, and if less, the balance is owed by the end of April.

The rules

  • Withholding is an estimate by the employer, based on the pay alone. It does not know about an RRSP or FHSA contribution, rental income or investment income.[1]
  • A deduction therefore does not lower the tax taken from each paycheque. It lowers the tax on the return, so the saving arrives as a refund the following April.[2] See RRSP room and deduction and the FHSA.
  • A taxpayer who expects a large refund can ask CRA to reduce withholding with Form T1213. If approved, the employer withholds less in each pay.[3]
  • Income with no withholding, such as business or rental income, is paid when the return is filed, or in instalments through the year; see self-employment income.
  • Issuers withhold on lump-sum registered withdrawals at 10% up to $5,000, 20% from $5,000 to $15,000 and 30% above $15,000, the rate set by the payment size applying to the whole payment (outside Quebec).[4] In Quebec the federal rates are 5%, 10% and 15% on the same bands,[5] and Quebec income tax is withheld as well: 14% on an RRSP or RRIF lump sum, and on an FHSA payment 14% up to $5,000 and 19% above.[6] A RRIF payment is withheld on only above the year's minimum.[7] This is a prepayment, not the final tax.

What the engine does

  • Takes one-twelfth of the year's income tax, CPP and EI on a person's salary alone out of each month's pay. It does not use CRA's payroll formulas; an employer that does lands close.
  • Leaves the deductions, rental income, investment income and similar items to the annual return, and books the refund or the balance owing the following April.
  • Files each person's return once a year, in December, on the whole year. Until December the tax withheld so far counts as the year's tax; tax on rent, investment income and gains, which nothing withholds, shows in December.[8]
  • Offers the T1213 as an option, off by default. When on, withholding falls as RRSP and FHSA deductions are made through the year, and approval is assumed every year. December's deduction is left to the return.
  • Applies the lump-sum withholding bands above to taxable withdrawals when no amount is supplied, and settles any difference at assessment.
  • Settles tax not withheld at source in one April payment. The first April of a plan settles only what the plan is told about the year before, which is nothing by default.

What it deliberately does not

Quarterly instalments and instalment interest are not modelled, only the single April payment.[9] The T1213 lines other than the RRSP and FHSA deductions (child care, support, donations, carrying charges) are not used. The size of a refund in the plan follows from the withholding estimate, so a real employer's withholding will differ. For what sits on a return, see income tax brackets.

See also

  • Capital losses and the superficial-loss rule · A loss on a non-registered investment first cancels capital gains in the same year; any excess carries back three years or forward without limit. A loss is denied if the same investment is bought back within 30 days.
  • CPP and EI contributions · Canada Pension Plan and Employment Insurance contributions come out of each paycheque up to a yearly ceiling. The plan calculates both from salary, and treats the self-employed as paying both halves of CPP.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • RRIFs and the wind-up at 71 · An RRSP must become a RRIF by the end of the year you turn 71, after which a prescribed minimum comes out and is taxed every year. Give a birth year and the plan models it; leave it blank and a plan running past 71 looks better than it is.
  • RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
  • Self-employment income · A sole proprietor's net business income is taxed on the personal return, with nothing withheld during the year and both halves of CPP owed. The engine can model a simple sole proprietorship; All the Numbers does not ask for one, so plans treat everyone as an employee.
  • The First Home Savings Account · $8,000 a year with one year of carryforward and $40,000 for life, deducted from income and withdrawn tax-free for a first home. The refund is credited the following April, and the account winds up into an RRSP if it is never used.

References

  1. ↑CRA Form T1213 "Request to Reduce Tax Deductions at Source" (for deductions or non-refundable credits that are not part of the Form TD1, read 2026-09-23) · Each month's pay has one-twelfth of the year's income tax, CPP and EI on that salary alone withheld (not the CRA T4127 payroll formulas); RRSP and FHSA deductions, suite rent and investment income are left to the annual return, and the difference is refunded or paid the following April. A T1213 reduction is an option · effective 2026-09-23
  2. ↑CRA — Tax deductions for FHSA contributions · FHSA contributions are deductible from income for the contribution year or a future year (RRSP-like); lifetime deduction maximum $40,000; unclaimed deductions carry forward indefinitely; transfers in from an RRSP are NOT deductible · See the source · effective 2023-04-01
  3. ↑CRA Form T1213 E (25) "Request to Reduce Tax Deductions at Source": Part 3 line 1 (RRSP contributions, "without exceeding your RRSP deduction limit"; not those deducted from pay) and line 11 (other deductions — the FHSA deduction); "You must make this request every year" · With an approved Form T1213, pay withholding is reduced for the RRSP and FHSA deductions made so far in the year — by month m, m/12 of what those deductions save on the year's pay has been withheld less. The form's declared amount is not used (the plan's contributions depend on the cash the withholding leaves); December's deduction is left to the return. CPP and EI are unchanged; the year's tax is unchanged. Approval is assumed every year; other T1213 lines (child care, support, donations, carrying charges...) are not modelled · effective 2025-01-01
  4. ↑CRA RC4157(E) Rev. 25 — lump-sum payments; Income Tax Regulations 103(4); CRA "Tax rates on withdrawals" (2026-01-29) · Issuer withholding on lump-sum RRSP/RRIF(above minimum)/FHSA taxable withdrawals outside Quebec: 10% up to $5,000; 20% over $5,000 to $15,000; 30% over $15,000 — the rate set by the payment size applies to the whole payment (combined federal+provincial administrative rates; Reg 103(4) prints the federal-only 7/13/20%) · See the source · effective 2026-01-01
  5. ↑CRA, Tax rates on withdrawals: "10% (5% in Quebec) on amounts up to $5,000; 20% (10% in Quebec) on amounts exceeding $5,000, up to and including $15,000; 30% (15% in Quebec) on amounts over $15,000" · Federal withholding on lump-sum RRSP/RRIF(above minimum)/FHSA taxable withdrawals in Quebec: 5% up to $5,000; 10% over $5,000 to $15,000; 15% over $15,000, the rate set by the payment size applying to the whole payment; Quebec income tax is withheld as well · See the source · effective 2026-01-01
  6. ↑Revenu Québec, Payments From an RRSP, a VRSP, a PRPP or a RRIF; Payment Out of an FHSA · Quebec income tax withheld on a single payment from an RRSP, or on the part of a RRIF payment above the minimum: 14%; on a taxable payment out of an FHSA: 14% up to $5,000, 19% above. Added to the federal 5/10/15% · See the source · effective 2023-01-01
  7. ↑Income Tax Regulations 103(6)(d.1) · RRIF payments are lump sums for withholding only to the extent they exceed the year's minimum amount (146.3(1)); the minimum is paid without withholding · See the source · effective 1992-01-01
  8. ↑ITA 249(1): "a taxation year is … (c) in any other case, a calendar year" (an individual's taxation year, read 2026-10-22) · Each person's return is filed once a year, in December, on the whole calendar year. January to November the tax withheld so far (pay, pensions, registered withdrawals) is counted as the year's tax, so monthly net worth does not treat withholding as savings; tax on income with nothing withheld (rent, investment income, gains) appears in December. The year's tax, refund and balance owing are the same as assessing every month · effective 2026-10-22
  9. ↑ITA 156 (instalments required when net tax owing exceeds $3,000 in the year and one of the two preceding years); our convention · Income tax not withheld at source (business, rental, investment income) is settled in one April payment; ITA 156 quarterly instalments and instalment interest are not modelled · effective 2026-09-18