Most Canadians are likely of the view, having just gone through the process of pulling together various sources of information on income and deductions and having dutifully prepared and filed an income tax return for the 2025 tax year, that they can happily put the subject of income taxes to one side for the next several months.
While that’s no doubt a welcome thought, the fact is that it’s not too early to start planning with respect to 2026 income taxes: to the contrary, the earlier such planning starts, the better the outcome is likely to be.
By this point, about halfway through the tax year, most Canadians have a fairly accurate idea of how much their income for 2026 will be and know, in a general way, the kinds of deductions and credits which they will be able to claim on their return. As well, since the income earned and deductions claimed by most Canadians doesn’t vary greatly from year to year, the results obtained when the return for 2025 was assessed by the Canada Revenue Agency are quite likely to be similar to those that will follow from the filing of the 2026 return next spring.
Doing a mid-year review, instead of waiting until December (or worse, until tax filing time next spring) gives the taxpayer the chance to put into place any adjustments needed to help ensure that there are no unpleasant tax surprises when the return for 2026 is filed next spring. And, while the deadline for implementing most tax saving strategies may be December 31, it’s also the case that opportunities to make a significant difference to one’s current-year tax situation diminishes as the calendar year progresses
The results which followed the filing of the 2025 return can, in fact, alert the taxpayer to the need to pay more attention to their tax situation for 2026. Most taxpayers hope for (and in fact do receive) a refund while others are disappointed to find out that they owe additional taxes and therefore have a tax bill (on which interest may be accumulating) to pay. While the taxpayer’s reaction to those two situations may be very different, the reality is that both such outcomes signal a need to address tax planning issues for 2026.
Where there is a tax balance owing on filing, it signals that taxes were underpaid throughout the year, and the taxpayer is required to make up that shortfall by remitting additional tax amounts owed to the CRA. Conversely, getting a tax refund is often viewed by taxpayers as receiving “free” money. That’s not the case. Where the taxpayer receives a refund, it usually means that taxes were overpaid throughout the year, thereby providing the federal government with an interest-free loan of the taxpayer’s money. All taxpayers pay income tax throughout the year, and when that system works as it should, the amounts paid accurately reflect the taxpayer’s tax liability for the year, and so there is neither a significant tax amount owed or a significant tax refund received on filing. Carrying out a mid-year review of one’s tax situation for 2026 can help ensure that result when the return for 2026 is filed with the CRA next spring.
The first step in doing that review is figuring out how much one’s tax bill for 2026 is likely to be. Where income amounts and available deductions and credits are very similar for 2025 and 2026, the amount of tax owed by the taxpayer for 2025 (a figure that can be found on Line 43500 of the Notice of Assessment) is likely to be very close to their tax liability for 2026.
Where income for 2026 is likely to be significantly greater or lower than that received in 2025 (for instance, where a taxpayer retired at the end of 2025), or the taxpayer will have significantly greater tax deduction or credit claims (for instance, a large RRSP contribution or much higher than usual medical expenses) for 2026, taxpayers can use tax return preparation software for the 2025 tax year to get an idea of how much tax will be payable for 2026. Although the tax brackets and tax credit amounts used by tax return preparation software for 2025 will differ from those in effect for 2026, those differences won’t make a significant difference to the total tax bill. If anything, using 2025 tax return software to calculate the tax bill for 2026 will result in a slight overestimate of that tax bill, owing to the indexation of tax brackets and credit amounts, as well as a decrease in the federal tax rate applied to the first income bracket for 2026.
After getting a sense of how much tax is likely to be payable for the 2026 tax year, the next step in doing a review is to determine how much income tax has already been paid to the CRA for 2026 (remembering that by this point in the year, approximately one-half of the tax bill for 2026 should already have been remitted to the CRA).
There are two ways of paying income taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf – a process known as source deductions. Taxpayers who do not have income tax deducted at source – which would include self-employed individuals and, frequently, retired taxpayers – make tax payments directly to the federal government (four times a year, in March, June, September, and December) through the tax instalment system.
Where the individual involved pays tax by instalments, the solution is simple. They can simply change the amount of remaining instalment payments to be made in 2026 so that the total instalment payments made over the course of this year accurately reflect the total tax payable for the year.
The situation is a little more complex for employees, or anyone who has tax deducted at source. Where a taxpayer finds that source deductions being made will not be sufficient to cover their tax liability for the year (meaning a tax bill to be paid next spring) the solution is to have those source deductions increased. No one likes paying more taxes, but where taxes are owed the only choice involved is to pay them now or pay them later. Spreading out that payment over the rest of the tax year is much less painful than being hit with a large tax bill (as well as interest charges when that tax bill can’t be paid in full and on time) when the return for the year is filed next spring.
Take, for example, an employee who, after filing the return for 2025, received a bill indicating that an additional $1,000 in taxes was owed. Assuming that their income and the amount of tax deducted from their paycheque doesn’t change, it’s likely that a similar amount will be owed when the return for 2026 is filed. If that taxpayer is paid biweekly, there will be about 13 paycheques between the end of June and the end of the year. Increasing the amount of tax deducted from those paycheques by about $75 per paycheque will mean that the $1,000 in taxes owing is paid to the Canada Revenue Agency by the end of the year – thereby avoiding that large tax bill when the return for 2026 is filed in the spring of 2027.
To increase the amount of tax deducted from their paycheque, the employee needs to obtain a TD1 form for 2026, which can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html. On the second page of the Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct their employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a go-forward basis.
No one particularly likes thinking about taxes, at any time of year, but ignoring the issue definitely won’t make it go away. The investment of a few hours of time now, and putting in place any needed adjustments, can mean greater peace of mind (and reducing the risk of facing a large tax bill) when the return for 2026 is completed and filed next spring.