John Natale, Assistant Vice President, Tax and Retirement Services at Manulife
Instead of celebrating a tax refund, Canadians should look at ways to avoid paying too much tax in the first place, says John Natale of Manulife Investments.
A refund might be cause for initial excitement, like finding a forgotten bill in your coat pocket, but in reality you've paid the Canada Revenue Agency (CRA) too much tax. Furthermore, you've missed out on the ability to have your money working for you throughout the year, he says.
"The government gets to use that money for their benefit. It's like you're giving them an interest-free loan," says Mr. Natale, Assistant Vice President, Tax and Retirement Services at Manulife in Waterloo, Ont.
How to avoid overpaying taxes? By informing the government in advance of certain deductions you'll have for the tax year. That includes non-payroll Registered Retirement Savings Plan (RRSP) contributions, child care expenses, support payments, employment expenses, and carrying charges or interest expenses on investment loans. Any of those will be deducted from your income, and therefore lower the tax you need to pay.
Start by getting the CRA's T1213 form, Request to Reduce Tax Deductions at Source. Quebec residents must also complete and file form TP-1016, Application for a Reduction in Source Deductions of Income Tax, with Revenu Québec. The government will then authorize a reduction in the taxes that your employer takes off your paycheque.
Rather than waiting for that lump sum tax refund in the following spring, you now have more take-home pay each week, Mr. Natale says. "That's worth even more than a refund – you can also earn interest on that amount."
Using that money to reduce debt, starting with the debt that has the highest interest rate, is a smart way to benefit from the money that otherwise would have been sent to the government, he says. That's usually credit card or other consumer debt, followed by your mortgage. You can also use the additional money to increase your savings, by adding to your RRSP or Registered Education Savings Plan (RESP), topping up your Tax-Free Savings Account (TFSA), or creating an emergency fund.
Whatever your strategy, having the money at your disposal now rather than at tax refund time improves your cash flow, Mr. Natale says.
Is there any disadvantage to eliminating a tax refund? No more celebrating "found money." But that money isn't really found, Mr. Natale says. It just hasn't been available to you all year.
Canadians don't usually splurge with their refund – 70 per cent 1 use it either to pay down debt, save or invest it, a survey found. With proper planning to reduce taxes from the start, they can put it to use that much sooner, Mr. Natale says.
1 CIBC poll of more than 1,000 Canadians conducted by Harris/Decima in April, 2011