Have most of you already received your tax return? What were you planning to do with it? Put it into your TFSA, on your mortgage or take that trip you’ve been dreaming of? How about NOT getting a tax return and get that money in your pocket each payday? This may not make sense and seem inefficient, but here’s an explanation of why it might be smart not to get a tax return in a lumpsum.
Where does the tax return come from?
We all see our paycheck reduced by “a lot” when we get it! The government deducts our estimated yearly tax liability at the source, as well as EI and CPP (RRQ in Québec) contributions. However, your payroll department cannot take into account what personal expenses you will be deducting every year.
For example, your employer doesn’t know how much you will be contributing to your RRSP. Nor do they know if you have child-care expenses, spousal support or will make a donation to a charity. All these expenses are deductible from your income. When you do deduct them, that’s where your tax return comes from.
Why would it be smart NOT to get my tax return?
Firstly, it’s important to know that the CRA (Canada Revenue Agency) gets your hard-earned money deducted from your paycheck and makes a lot of interest on it. This money could be contributing to your own financial plan instead of the government’s! Depending on when you file your taxes, it could take as long as 16 months to get your tax return back!
Example
April 15th you receive your tax return of $6000. This is a significant amount of money that you could put back into your RRSP or in your TFSA. However, wouldn’t you like to have an extra $500 in your account every month? If you invested that money yourself monthly and made 5% (yearly) interest on it, in a year you’ll have $6161,00! You are better off this way!
Ask CRA to change your deducted taxes
If you feel you want to take that road and make your money work for you, you’ll have to ask the government to do so. Also, it’s a good idea to inform your payroll officer of what you want to do. It’s fairly easy! Start by filling this document T1213 Request to Reduce Tax Deductions at Source and then you need to send it to your nearest tax center, which you can find on the Government of Canada’s website.
If you qualify, when you receive the approval from the government then you need to go see your payroll officer with the paperwork. You can get into this process anytime during the year, but the earlier the better (January/February).
What to do with the extra money?
Now that you won’t get the lumpsum tax return, you need to figure out what you want to do with the extra money. You must evaluate your needs and priorities. Do you have an emergency fund? Do you have kids, debts? Here are a few things you can do:
- Set up an emergency fund if you don’t have one. You never know what life has in store for you. If you lose your job or have an accident and can’t work for a while, you’ll need to keep paying the bills. We suggest a 6-month fixed expense fund.
- Put the money into your RRSP or TFSA (if you have room)
- If you have kids and you want to send them to a good university, it would be smart to open an RESP for each of your children.
- Pay off your debts
- Pay your mortgage faster