How to Estimate Your Taxes So You’re Never Surprised
Every spring, two groups of Canadians are equally confused. The first group gets a big tax refund and feels great about it. The second group gets a surprise tax bill and feels terrible. Neither group planned for what happened.
A big tax refund means you overpaid taxes throughout the year and handed the government an interest-free loan. A big tax bill means you underpaid (or did not have enough tax withheld at the source) and now you're scrambling. Both are avoidable.
The fix is simple: get better at estimating your taxable income and your taxes owing before the end of the year. A free tax calculator like the one at TaxTips.ca makes this easier than you'd think. Here's how four different Canadians use it.
Bill: The Business Owner
One of the advantages of running your own business is the ability to control how, and how much, you pay yourself. But with that flexibility comes responsibility. Nobody is withholding tax on your behalf, so if you're not estimating carefully, April is going to hurt.
Bill operates through a corporation and pays himself a salary of $116,000, right to the top of the 30.5% marginal tax bracket in Alberta, plus $32,000 in non-eligible dividends from retained earnings in his company.
A quick note on dividends: eligible dividends come from income taxed at the general corporate rate and carry a higher gross-up and tax credit. Non-eligible dividends come from income taxed at the small business rate and are treated slightly less generously at the personal level. Either way, dividends are grossed up before tax is calculated, then a dividend tax credit is applied.
Because of the 15% gross-up on non-eligible dividends, Bill's actual income of $148,000 becomes taxable income of $152,800. His combined federal and provincial tax bill: $35,292, at an average rate of 23.8%. If Bill is making quarterly instalments, this is exactly the target.
But here's where it gets interesting. Bill paid himself that same $116,000 salary last year, which generated $20,880 in RRSP contribution room (18% of earned income). If he makes that full contribution before the deadline, his taxable income drops to $131,920 and his tax bill falls to $27,776.
That's a saving of $7,516, or roughly 36 cents back for every dollar contributed. It maps exactly to Bill's marginal tax rate on employment income.
Tyler: The Employee with Appreciated Company Stock
Tyler works in oil and gas and earns $170,000 a year in salary. Over the years he's accumulated $120,000 worth of company shares in his taxable account, purchased originally for $40,000. He wants to diversify, but he's been putting it off because he's not sure what the tax hit will look like.
Here's how to think about it. Tyler has an unrealized capital gain of $80,000. In Canada, only 50% of a capital gain is included in taxable income, so selling those shares adds $40,000 to his taxable income, bringing him from $170,000 to $210,000. Running that through the 2026 Alberta tax calculator: taxes payable jump from $45,925 to $62,314, a difference of $16,389.
That sounds like a lot. But look at it another way: Tyler receives $120,000 in cash from the sale, nets an $80,000 gain, and pays $16,389 in tax on it. That's an effective rate of 20.5% on the gain.
Now here's the part Tyler didn't know. He has $40,000 in available RRSP room. He just sold $120,000 worth of stock and has the cash. If he contributes $40,000 to his RRSP, that deduction offsets the $40,000 capital gain inclusion and his taxable income drops right back to $170,000. The additional tax from triggering the sale effectively disappears.
That leaves Tyler with $80,000 in cash remaining after the RRSP contribution to top-up his TFSA and buy a more diversified ETF in his taxable account. He gets the diversification he wanted, a fully sheltered RRSP contribution, and no surprise tax bill.
Trinity: The Self-Employed
Trinity is self-employed and expects to earn $87,000 this year after deducting business expenses. No employer is withholding tax on her behalf, and she hasn't yet hit the threshold where CRA requires quarterly instalments. The discipline has to be her own.
She's heard the rule of thumb: set aside 30% for taxes. It's not terrible advice, but it's imprecise. That 30% figure reflects her marginal tax rate, what she'd pay on the next dollar earned.
Her average tax rate, what she actually owes on the full $87,000, is 20%. The 2026 Alberta tax calculator confirms it: taxes payable of $17,382.
The difference matters. Setting aside 30% would mean holding back $26,100, leaving her roughly $60,900 for living expenses and savings. Setting aside the right amount, 20% or $17,382, leaves her close to $70,000. That's over $8,700 she doesn't need sitting in a tax reserve account all year.
Trinity's approach: every time a payment comes in, 20% goes straight to a separate savings account, earmarked for her April tax bill. No surprises or scrambling, and no over-withholding from herself.
Sharon: The Retiree
Sharon is retired and targeting about $90,000 in taxable income for the year, deliberately staying below the OAS clawback threshold. That gives her some buffer if investment income comes in higher than expected.
Her income comes from several sources: $15,000 in CPP, $9,000 in OAS, and a $46,000 RRSP withdrawal. On top of that, her non-registered accounts generate $3,000 in interest, $4,720 in foreign dividends, and $6,000 in Canadian eligible dividends. She also anticipates selling some investments for a capital gain of $8,000.
This is where retirement gets complicated. Unlike registered accounts, a non-registered account generates taxable income every year whether you withdraw anything or not. The withdrawal isn't taxable – the investment income is.
Interest and dividends are taxable as they're earned. Selling appreciated investments triggers a capital gain. Only 50% of that gain counts as taxable income, so Sharon's $8,000 gain adds $4,000 to her taxable income.
Canadian eligible dividends get grossed up by 38% before tax is calculated (then a dividend tax credit is applied), so her $6,000 in dividends shows up as $8,280 in taxable income. Foreign dividends and interest are taxed as regular income.
Add it all up: actual income of $91,720, taxable income of $90,000, and a tax bill of $16,381 at an average rate of 17.9%, call it 18% for planning purposes.
For withholding, Sharon logs into My Service Canada and sets her CPP and OAS withholding to 22%. Through Wealthsimple, she manually adjusts the withholding on each RRSP withdrawal to 22% as well. That slight over-withholding on those income streams helps offset the fact that interest, dividends, and capital gains have nothing withheld at source.
The result: Sharon owes $981 at tax time. Not a shock, and well below the threshold that would trigger mandatory quarterly instalments going forward. More importantly, she knows which income streams she can control the withholding tax on, and which ones she can't.
The Common Thread
We need to do a better job with our taxes than just handing all of our slips to an accountant (or uploading them to your favourite tax software) at year-end and hoping for the best. We have the tools to properly estimate our taxes owing at the start and throughout the year.
In these examples, it's just about taking 30 minutes at the start of the year to run their numbers through a tax calculator, understand where their income is coming from, and make sure the right amount of tax is flowing to CRA throughout the year.
Take a quick look over your expected income streams for the year and run them through a tax tool to avoid the two things nobody wants: a tax bill you weren't expecting, or a refund that just proves you've been giving the government an interest-free loan all year.
Lots of good examples here Robb. This post reminded me of an exercise I undertake every year as we are approaching retirement in 2027. I take my just completed taxes, save it to a new file, age us up by changing our birth years, and then update/create slips to reflect what we will earn in retirement (db pension for her, rif withdrawals for both, etc.). I can then get a clear picture of what we would have paid in taxes based on retirement income in 2025 It takes about 60 minutes but then I can confirm the numbers I have in my spreadsheet and it helps validate my projections.
I’ve been doing that for years! One of the good uses for my tax software. When it comes to paying income tax, I’d rather not be surprised. 🙂
I do the same. I started when I was about to retire at 65 to see the effect of the age credit and income splitting.
Although I’m loathe to promote TurboTax, I noticed it has a Tool called Planner Mode for 2026. The tool converts the tax calculations to approximate the tax situation the following year including estimates of next year’s tax rates and tax credits. I haven’t tried the tool yet.
Excellent article Robb. As a former accountant I can confirm you are correct when you say too many people are surprised at tax time. No one likes to owe more money and a refund seems like a windfall. If I could, allow me to point out a couple of small details in your examples. Since Bill received income from his corporation as an employee, his company would be required to withhold CPP and income tax from his wage. That would mean he only needs to estimate the taxes on his dividends. And since Trinity is self employed, she’ll also need to pay both portions of CPP when she files her taxes, something many people overlook. Both of these are items I’m sure you’re aware of, just not clearly explained in your examples. Thank you for continuing to educate everyone through your blog. I look forward to receiving your weekly email.
Thanks Donna! It’s always funny to hear people say that they’re waiting for their accountant to tell them how much they owe so they know “how many RRSPs they need to buy” 🙂
Correct, I neglected to include the CPP amounts for the self-employed situation, or clarify that the business owner would only need to pay instalments (or calculate estimates) for his dividend income. Precisely what we do each year.
Thanks again for your comments and kind words!
But doesn’t Trinity owe CPP contributions on her self employment income?
Good catch and you are right! I just ran it through the taxtips website and it does calculate $17,382 as Robb correctly noted but the site sates that “CPP and EI premiums or related deductions/tax credits” are not included.
If you hold ETFs (especially all-in-one ETFs) in a non registered account, it is more complicated. Only at the end of March do you know the amounts for dividends, capital gains and foreign income for last year. Moreover, in most cases, capital gain is distributed as phantom distribution with is taxable even though you do not receive it in cash. Some fund managers post phantom distribution estimates before year end, but in many cases, they do not reflect the actual amounts.
As mentioned in other comments, I just use the T3 and T5 slips from the last year for a rough estimate, it’s good enough for these purposes.
Phantom distributions don’t affect the tax payable for the year. They should be used for your accounting – to adjust (increase in this case) the cost base of the investment. The tax effect happens when you sell some of your shares of that investment – but that will be in the future, fully in your control.
You still need to pay the tax on the phantom distribution the year it is incurred. As for using T3 from last year: it is a very inaccurate assumption. However, there doesn’t seem to be any other alternative during the year.
You’re right, there is capital gains tax payable on phantom distributions, forgot about that part, sorry.
I don’t think the last year data is very inaccurate, as long as you’re not actively buying and selling NR assets during the year. But if you want to plan for the worst case scenario, you can check what phantom distributions the ETF had paid through the years on the ETF company site and take the maximum amount (plus some padding if you want) as a pretty safe estimate.
FWIW, I was holding XSP (hedged S&P 500 ETF) in a non-registered account, and was hit with a nasty surprise one year when the amount of reinvested capital gains (phantom distribution) spiked significantly.
I suspect the spike was caused by changes in the CAD/USD foreign exchange rate during the year, and the need to account for that in the hedging strategy. Assuming that was the cause of the spike, the moral of the story is that last year’s data can be quite misleading when dealing with hedged ETFs.
As it bothered me to be paying capital gains tax on a gain I wouldn’t actually be realizing for some number of years, I sold XSP (which I hadn’t been holding for that long a time). XSP now only resides in my RRSP.
PS, In the non-registered account, I switched out from XSP and into HSH (Global X S&P 500 CAD Hedged Index Corporate Class ETF).
No pesky dividends, return of capital, or reinvested capital gains to worry about.
I am struggling to see a scenario entailed needing to account for tax on phantom distributions in advance. That said, accurate information is published by the end of Feb so you can do your calculations then if you really need to.
Depending on the size of your non registered portfolio and the year, the phantom distributions effect could be substantial. Unfortunately, the end of February is too late to adjust withholding deductions for last year and you may end up owing the CRA more than you planned for.
Hmm. I had a look; the largest non-cash distribution was in 2017. Pro-rating to 1M non-reg portfolio it was like $4k. Does not seem like a big deal in terms of tax hit. Mileage may vary, depending on specific ETFs; lets say its 10k in phantom distributions per $1M (unlikely; thats very conservative). Its usually capital gain (not always), so 10k in distributions translates to circa 2.5k. You only ever get this issue with Canadian ETFs, one assumes that’s only a fraction of your assets.
Why do you even care about withholding this amount? Just pay at the end of April when its due. My philosophy is that I’d rather get the interest in my pocket than CRA’s.
Guess I am struggling to see why its a problem for you.
$2,500 to s a lot of money to plan for. This kind of money can get you paying instalments which is exactly what we wish to avoid. My comment was just to say that it complicated the tax planning and the withholding tax you should request.
Maybe this might help – https://www.adjustedcostbase.ca/
The paid version (~$50) has, among other things, T3 preview, which says:
“This tool enables you to preview your T3 tax data earlier in the tax season. While brokerages often issue official T3 slips close to the March 31st deadline, tax data for most ETFs and publicly traded funds is available 6–8 weeks in advance of that deadline. Use this tool to get a head start on your tax return and cross-validate your data.”
6-8 weeks should get you to mid Feb. If you have some unused RRSP contributions room, then you can still counter the case you’re worried about, if it arises.
TaxTip.ca is a brilliant tool. Not only does it do an excellent job of estimating your taxes, it provides a mechanism for testing the tax consequences of pretty much every assumption you could make about changes to your investments. One can see what the effect of increasing dividend income, transferring qualified pension income between spouses, increasing/decreasing RRSP contributions, etc..
Agreed. I am self-employed and have been using the detailed tax calculator on Taxtips.ca for years to plan my annual taxes. It’s a great tool. Each month, I set aside the appropriate tax reserve. I’ve never had an unpleasant surprise at tax time and never had a problem with CRA.
Great article Robb (and timely). I just completed our taxes for the year and was thinking I need to be more proactive as the family is changing and we move into a retirement decumulation phase.
I have looked on the taxtips site for info in the past but wasn’t aware of this planning tool.
I am like Bill. Pay tax as late as I possibly can without incurring penalties. Generally its just coming out of cash flow without any issues, but we obviously know whats coming and have a buffer.
In the first year, end of FY tax liability was going to be large, so we tracked it and kept an offsetting amount in ZST.L. On the personal side it tends to be small compared to our cash buffer.
I’ve moved our corporate chequing and investments to Wealthsimple now and it’s pretty slick. One corporate chequing account (no fee, no minimums) as an operating float, and one sub-account as a placeholder for GST collection. Both pay 2.25% interest. Nice and easy.
My wife’s personal return showed a refund of 1 cent, so we had her instalments and deductions perfectly lined up last year.
Great article and it especially highlights the importance (and complexity!) of calculating what your income looks like in retirement. Although the focus of the article is the need to understand what we might have to pay in taxes on our returns, it is also critical for retirees to track taxable income against OAS clawback thresholds, marginal tax rate brackets, and even for things like income splitting. And that’s not even getting into RRSP meltdown strategies!
For all these reasons, and as a retiree, I do two simple things:
1. I have an easily maintained spreadsheet that estimates our various sources of income based on the best available information we have (usually from our previous year’s tax returns and T3, T5, and T5008 slips).
2. I recognize that we have full control over RRSP withdrawals (at least until we turn 72 before mandatory RRIFs withdrawals kick in). We use this as a variable in our income planning plus we structure our cash flow such that we can take a sizable portion of our RRSP withdrawal late in the year and once we have a better picture of what our taxable income will look like.
Terrific and timely article, Robb. I just finished doing my taxes with Wealthsimple Tax which seemed easier and more intuitive to use vs. last year. I am now in the retiree category and keep things simple by sticking with my existing investments. That makes my T3/T5 figures numbers more predictable. At the same time I’m juggling new income having started CPP and converted my RRSP to a RRIF, but not started OAS. The key is staying organized throughout the year by tracking withdrawals, medical costs, and any other taxable activities as they happen. I’ve built a template listing all my T slips for the last three years and now I’m ready for 2026.
I max out my RRSP contribution each year and get a nice refund. However I’m aware that I’m giving the govt an interest free loan as you stated. I heard there is some form I can fill out and send to the govt and my employer, or both? that will reduce my income tax deducted per paycheque. Are there any risks or cautions to doing this? I’m a plain ol salaried employee with a single T4, plus a bit of unreg interest/dividends per year.
Hi Tansy, yes there is a T1213 form to reduce withholding tax on your paycheque. Fill it out annually (usually around Oct/Nov for the following year) in your My CRA Account and CRA will send you a letter to give to your employer to reduce withholding tax due to the RRSP contributions that you promise to make.
Read more here: https://boomerandecho.com/how-to-crush-your-rrsp-contributions-next-year/
Risks? Well, you could *not* make the RRSP contributions and end up owing money at tax time. The risk is that CRA won’t be happy and less likely to consider future T1213 form requests from you.
Is there a reason for wanting to avoid paying installments?
I think there are two key reasons:
1) Giving the government money ahead of the actual tax deadline denies taxpayers the opportunity to keep that money invested until the deadline
2) There are often unusual circumstances that lead to the requirement to make installments. I think the the rules is that it has to be twice in three years where if one owes more than $3,000 they will be asked to pay installments. If in the following year they don’t pay the installments, and they do owe money at tax time then they may be charged interest on the requested installment back to the installment date.
On the other hand, if one makes the installments and they end up owing less than $3,000, or worse, get a refund then see point 1.
For me, I hope to avoid installments. I will use the available tools to predict my taxes and if there’s a chance I’ll owe more than $3,000 I will make a payment to CRA in late December to make sure I stay below the threshold.