What is a Personal Tax Credit Return? Your Guide to TD1 Forms

If you're a business owner planning to run payroll in Canada, you’ve probably heard of a TD1 form – but perhaps it’s not clear what this form is and why you need it to pay your employees. This form, also known as a personal tax credit return, is used to determine how much tax can be withheld from a person’s income (whether that be employment income or other types). When onboarding new employees, this is an important form you’ll need your new hire to fill out so you can send it to the Canada Revenue Agency (CRA).

Understanding TD1 forms and source deductions

So, what’s the purpose of the TD1 form, and why is it so important? Simply put, the TD1 form gives the CRA a means to accurately estimate how much a person will owe the government in taxes each fiscal year and make the required deductions from their paycheck. This form is mandatory for employers and handy for employees (or pensioners) as they don’t have to manually calculate their taxes and source deductions.  

Keep in mind that this information collected by the CRA is only an estimate. If the government has deducted more than necessary in taxes, they will issue a refund to individual employees after an assessment of their tax return filings is complete.

When is a TD1 Form Required?

There are several instances where one might need a TD1 tax form, and as an employer, it helps to know what these scenarios might be. A TD1 form is required if:

• A new employee starts working for you
• An employee needs to alter or modify the amounts of claims and income
• An employee wants to increase the amount of taxes deducted at the source
• An employee wants to claim deductions for living in a prescribed zone
• One is beginning to receive a pension

Are TD1 Forms Paper or Electronic?

Before 2020, TD1 forms were only distributed by employers to employees in paper format. But as of January 2020, employees can now fill out the forms on their own online. The form isn’t difficult to fill out and can help your employees estimate the tax credits available to them and can give them a rough idea of how much they’ll owe the government. 

How to Fill out a Federal TD1 Form

Your employees might have some questions for you about how to complete their TD1 form, so it’s important to know how the form works. There are instructions on the federal and provincial forms that must be followed in detail. Provincial forms may vary by province, but here is an outline of the Federal form. 

An important note to mention is the worksheet or TD1-WS that comes with the TD1 form. This is a separate sheet from the TD1 form, but the two are related to each other. The main purpose of filling out the TD1-WS is to provide more specific information about your financial situation so that the government can make the appropriate calculations. The TD1 form will prompt you to fill out the worksheet when necessary.

The federal form is divided into a few steps. At the beginning of the first page, the person completing the form will need to provide:

• First & last name 
• Date of birth 
• Address 
• Social insurance number

The federal form also has several important boxes that might be confusing to some individuals. Here is a breakdown of each form part, box by box: 

Box 1 is the Basic Personal Amount. This box represents a non-refundable tax credit. This means that you will not be charged any tax on the first $15,000 you earn within the year. 

Box 2 is the Canadian Caregiver Amount for children under the age of 18 with disabilities. This section will reduce the amount of income tax you must pay. The claimable amount in this section is $2499 for each child with disabilities under the age of 18.

Box 3. is the Age Amount. If you are 65 or older as of December 1st, 2023, and your income is $42,335 or less then the amount you can put in this section is $8,396. However, this deduction (the deduction being $8,396) is reduced when you have a higher income. So if your income is between $42,335 and $98,309, you will need to fill in a worksheet to prorate the amount you can claim.

Box 4 is the Pension Income Amount. The pension income is a flat $2000 and includes any pension income (excluding federal programs). So if you have at least $2000 of pension income, you can put $2000 in this box. Put down the lesser amount if you have less than $2000 in pension income. You will only receive a deduction for the amount you receive up to $2000.

Box 5 is Tuition for full-time and part-time students enrolled in post-secondary education. If you pay more than $100 in tuition, you will put the amount you paid within the year in this box. 

Box 6  is the Disability Amount. If you’ve received a disability tax credit, then the amount of disability credit you are eligible for is $9,428. If you are a person with a disability, but you haven’t applied for the disability tax credit, then you would not put the $9,428 in box 6.

Box 7 is for your Spouse or Common Law Partner. In order for you to be eligible for this claim, you need to be living with the spouse who you are supporting, and your spouse’s net income needs to be less than $15,000 per year. In this box, you will enter the difference between the estimated amount your spouse makes and the amount in line 1. You may add $2,499 if your partner is a person with disabilities. 

Box 8 is the Amount for an Eligible Dependant. If you don’t have a spouse or common-law partner but you have a child dependent on you, you can subtract their income from $15,000 and put the difference in box 8. 

Box 9 is the Canadian Caregiver Amount. If you have a spouse with disabilities infirm or have no spouse but have an eligible dependant under the age of 18 with disabilities, you will need to fill out the worksheet.

Box 10 is another version of the Canadian Caregiver Amount. You may fill this box out if you support a disabled individual who is over 18 years old and who makes $18, 783 or less per year. If this is the case, you may put $7,999 in this box.

Box 11 is for the amounts transferred to you from your spouse or common-law partner, up to $5000. 

Box 12 is for the Amounts Transferred from a Dependent. An example could be a child transferring tuition or disability money to their parents. There is a maximum transfer of $5000. 

Box 13 is the total sum of the amounts entered in boxes 1 through 12. 

All the above boxes are listed on the first page of the TD1 form. On the second page, you will find a box that asks if you have a second employer. If your employee does have a second employer, ensure that they tick that box off. There will also be a box that will ask if you earn less than the claim amount in box 1. If this is the case, you will need to tick this box as well.

What’s the difference between federal and provincial TD1 forms?

As mentioned earlier, there are two types of TD1 forms: federal and provincial. A new employee needs to fill out both forms and submit them to you. Why do they need both? because federal and provincial government taxes are different and have varying tax rates and credits. In addition to the standard TD1 form, you’ll find the provincial versions like TD1ON (for Ontario) and TD1NB (for New Brunswick) for each province. The total amount claimed in the forms helps calculate the deductions to be made for taxes from an employee’s gross earnings.

Do all my employees need to complete a TD1?

All employees must fill out the form when you hire them. But for future roles or positions they hold within your company, they don't need to complete a TD1 form unless they have major changes to their credits or income.

TD1 Form misconceptions

One of the more common misconceptions around TD1 forms is thinking that an employee needs to submit the form to the CRA . In reality, once it’s complete, the form is always submitted to you, the employer. 

Another common misunderstanding is that the data entered in the form changes how much tax is owed to the government. The amount of tax a person owes to the government is determined by their total income, minus their credits and deductions, and multiplied by their average tax rate. In some cases, the CRA will deduct too much from an individual, in which case they will receive a refund from the CRA. On the other hand, it's also possible that the CRA did not deduct enough, and the person will need to pay the difference.

What happens if my employees fail to fill out a TD1 form?

Employees who don’t fill out a TD1 form could be penalized $25 per day of delay. The minimum penalty is $100 and can increase up to $2,500. But helping your employees stay on track can avoid these problems.

Where can I Download the TD1 form? 

You can find downloadable versions of the TD1 form on the Government of Canada’s website. You will find links to the federal form and each province’s specific provincial TD1 form on this site. You will also find downloadable worksheets that correspond to each form. 

As a Canadian employer, there are many things to stay on top of, such as guiding your employees through payroll and tax processes. While running payroll requires attention and care to ensure you don’t miss out on anything like tax remittances. But when it comes to managing payroll and taxes, you could sit back and let QuickBooks do the heavy lifting. Sign-up today!

TD1 Form FAQs

Who needs to fill out a TD1 form?

If you’re hiring new employees or starting to earn a pension, you’ll need a TD1 form. Other scenarios include changing credits and income amounts. Changing the amount of tax deducted at the source, or wanting claims for living in a prescribed zone.

How much do you need to fill in a TD1 form?

If they want, your employees can claim their basic personal tax credits or even choose to have more tax deducted from their wages. The basic personal amount as of 2022 is $14,398. 

What is the difference between a tax credit and a tax refund?

Let’s say your employee owes $600 in taxes and qualifies for an $800 refundable credit, and they receive $200. That’s a tax refund. A tax credit is an amount that can reduce your total payable taxes, for example, tuition fees if an employee is a student.