A nice, fat tax refund cheque feels nice but, when you stop and think about it, you may be better off financially if you didn’t get it. The reality is that your refund isn’t a gift from the government – it’s your money that you overpaid in tax deductions from your pay cheque over the course of the year. And the government has that money for its use, interest-free. Instead of working for you this year, your money has been working for the government.
Getting a big tax refund is not good tax planning. Here are a few tips to help you keep more of your money working toward your financial goals – as well as a few ways to use this years’ tax refund (if you got one) to enhance your financial future.
How not to get a tax refund
1. Keep more of each pay by reducing the amount of tax withheld Each pay period, your employer withholds a portion or your paycheque and sends it to the Canada Revenue Agency (CRA) to cover your estimated year-end taxes. If that amount is excessive, you’ll eventually get a refund cheque – but it’s much more financially advantageous to apply to have it reduced by submitting a T1213 form to CRA – that way, you’ll keep a few extra dollars each month that you can invest for you own benefit.
2. Pay tax installments on time If you are on a quarterly personal income tax payment schedule, your installments are due on the 15th of March, June, September and December. Avoid penalties and interest by always making your payments on time.
3. Get an early RRSP deduction A common reason for a tax refund is a Registered Retirement Savings Plan (RRSP) contribution deducted at tax time. But if you’ve made your contributions earlier in the year, you can apply to the CRA (using form T1213) for a Letter of Authority that allows you employer to reduce the withholding taxes on your regular paycheque based on the amount of your RRSP contribution. If you make RRSP contributions through payroll deductions, you don’t need a Letter of Authority – just ask your employer to adjust your tax withholdings to reflect your RRSP contributions.
How to get the most from your tax refund
1. Pay down high-cost credit card debt.
2. Make an extra mortgage payment.
3. Pay off your RRSP loan.
4. Maximize your RRSP and Tax-Free Savings Account (TFSA) contributions or top-up contribution room from past years.
5. Add tax-advantaged Canadian equities to your non-registered portfolio.
Get more of your money working for your financial benefit by not getting a tax refund and by talking to your professional advisor today.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.