# Tax refund or ineffective tax planning?



## lb71 (Apr 3, 2009)

With all the talk of how people are spending their tax refunds (on this board and elsewher), there has been no mention of proper tax planning during the year. A tax refund is just us getting our money back from the government, money we have lent interest free through overpayment. How many people would invest in a product knowing the return is 0%? That’s what a tax refund is. I cannot find what the right statistics are, but I believe something like 80% of Canadians get a tax refund this time of year (can anyone confirm?). That’s telling me that 80% of taxpayers are paying too much tax during the year.

With proper tax planning, you can minimize your tax refund and increase your income during the year. Now small tax refunds of a few hundred dollars are nothing to worry about. But if you are receiving refunds in the thousands of dollars, you have been mismanaging your money.

There are tools that allow you to reduce the amount of income tax deducted from your pay during the year and realize that “refund” immediately:
Fill out a TD1 form. Everyone fills out a TD1 when starting a new job, but when you have life changing events, you can fill out a new one to reflect those events. For example, a new child will give you additional tax credits, reducing your tax payable. 
The TD1 is limited in how much tax relief you can get, since it only focuses on the tax credits from schedule 1 of your return. If you have major deductions in the year, such as large RRSP contributions or child care expenses, these will give you significant tax reduction during the year. However, to get these deductions recognized requires a bit more work on your part. You have to fill out form T1213 “Request to Reduce Tax Deductions at Source”. You mail this in to CRA along with supporting documentation. They send you an authorization, which you submit to your employer. This also has to been done annually. 
Group RRSP at source tax relief – I know at my work, the group RRSP plan allows me to recognize the tax benefits of the RRSP contribution in my pay. If you are part of a group RRSP, ask your employer if this tax relief is available.
Now, I can understand why people would like to leave things as they are. A nice tax refund is considered a “bonus” by a lot of people, a way of forcing them to save. Some people will just spend that extra cash flow during the year, so earning 0% in that case is better than just spending it. 

However, if you are disciplined, taking your “refund” with each pay will allow you reap additional benefits.

For those that use their refund as debt payments, it would be more effective to use an increase in net pay to reduce your debt. For example, say your refund was $2400, which works out to $200 extra net pay a month. An extra $200 a month applied to your monthly debt payments would go further to reducing your long term debt obligation than a $2400 lump sum at the end of one year. 

If your goal was to start a savings or investment account, those saving could have started earlier in the year, earning you some additional (albeit minor) income. In addition, if you invest in more volatile securities such as mutual funds, then spreading out your investment as $200 a month is less risky than a lump sum investment of $2400 due to dollar cost averaging.

Other things to consider are non-employment income, such as investment income, that is not taxed at the source, and requires you to pay the government at this time of year. If you find it difficult to save up for this expense, you can request your employer deduct extra taxes from your pay through the TD1 form. Of course, disciplined investors can take that extra pay and save it, earning a little extra interest before paying up to CRA.


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## nick24 (Apr 3, 2009)

I've been T1213-ing for the last few years. It's great! Any bonus money paid to me is designated as RRSP money and through the T1213 I've been receiving the money tax free. So, as you said, the money that I would normally receive as a refund is given to me upfront and therefore allows me to earn interest (hopefully!) via my investments, rather than waiting until the end of the year when the government gives me back my money.

As a soon to be dad, I'm going to check out the TD1 form. Great tip!


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## Jon Chevreau (Apr 4, 2009)

This is good advice of course although I must admit that personally I've not done this. The reason is that we get a fair amount of dividend income from our non-registered stocks, which creates a tax liability that is just about offset by the RRSP contribution. So in our case, if we had less tax deducted at source, we'd certainly owe several thousand dollars come April. 

Non-registered savings are of course the last priority for the younger investors at this forum, and well behind all the tax shelters like RRSPs, TFSA and RESPs. 

This point is made throughout Findependence Day.

www.financialpost.com/fd


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## ghostryder (Apr 5, 2009)

lb71 said:


> But if you are receiving refunds in the thousands of dollars, you have been mismanaging your money.


Not always true. My wife got a $1500+ refund this year due to things that are not easily predictable. Medical expense credit, our incomes have always been close so we are not always certain who is going to have to claim childcare expenses, and a big increase to our prov basic exemption were major factors this year.

As soon as new (2009) provincial TD1's were available we filled them in.


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## Patricia (Apr 3, 2009)

I have to agree with ghostryder, as well pension income splitting and transfers of tuition credits are also factors that can skew this. This year the accountant worked to minimize my income to the lowest income brackets with transfers and incoming splitting which resulted in my having a decent refund and my husband paying a small amount but the overall combined effect was a refund that was more sizeable than normal of $2400 +. I have filled out the TD1 and filed it with my pension administrators. So until the tuition credits are fully utiilized I don't see our refunds being much less. Not complaining though


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## lb71 (Apr 3, 2009)

You guys are right. Not all refunds are predictable. In some cases (like unexpected medical deductions or your income may change suddenly) you are not aware of it ahead of time. But if you know of certain deductions ahead of time (eg, monthly RSP contributions, child care) you can use the tools above to recognize the tax benefits immediately and increase your take home pay.


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## Retired at 31 (Apr 20, 2009)

Refunds suck! Better to owe a bit, but not too much, otherwise they'll want installments...


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