Looking forward to a hefty tax refund this spring? That’s actually poor planning, especially if you’re lugging around credit card debt, student loans or a negative balance of any kind.
It’s not like you’re really coming out ahead. That money was always yours to begin with. In fact, getting a large tax refund simply means you’ve remitted too much tax to the Canada Revenue Agency from the outset. Here’s how to keep more of your money, right from the start.
Keep That Money For Yourself
When you file your income taxes in April, the Canadian Revenue Agency will compare what you actually owe to what you’ve already paid through pay cheque deductions. You only get money back if you paid too much. That means you’re effectively giving the federal government an interest-free loan, since it’s really only refunding the overpayments you’ve been sending in throughout the year.
Settling up early this way is generally a bad idea, particularly if you expect to claim any deductions or non-refundable tax credits like RRSP contributions or child care expenses that will ultimately reduce your tax bill, says Toronto accountant Tim Cestnick, author of author of 101 Tax Secrets for Canadians.
Forced Savings Can Be Costly
Even when taxpayers understand that there’s a cost to overpaying taxes like this, the idea of receiving a refund can be appealing since many people view it as forced savings or even found money. But it’s still likely a mistake, Cestnick maintains. Most people would be better off if they had that cash in their own hands during year – paying down debt or perhaps earning a bit of interest in a TFSA.
Of course, that theory only works if you can demonstrate a bit of self control when it comes to managing your finances. If extra cash every two weeks is merely going to encourage you to add another ski trip to your itinerary, then you might be better off leaving things alone.
As well, someone whose financial affairs are a bit of a mess can easily end up with an April tax bill they can’t pay right away. In this instance, since you’re going to incur penalties for being late, you might appreciate the buffer that at-source deductions provide.
File The T1213 Form As Early As Possible
The most effective way to boost your take-home pay is to fill out and file the CRA’s T1213 form otherwise known as a Request to Reduce Tax Deductions at Source. Once approved, it authorizes your employer to reduce the taxes withheld from your pay throughout the year – provided you have a valid reason.
Those reasons might include the fact that you’re making pre-authorized contributions to your RRSP or your favourite charities, sending regular support payments to a spouse, or shouldering child care expenses. You can also add rental and business losses, as well as medical or employment-related expenses, to the list.
After submitting the form to the CRA, you may have to wait a couple of months before you see any impact on your paycheque though. Once approved, you’ll need your employer’s help, so be sure you talk to someone in human resources to see how things work in your company. If it’s a smaller business, for instance, it’s possible that not everyone will have prior experience to draw upon here.