Tax Refunds are Not Your Friend
Posted by John Draper | Filed under Taxes
It’s almost the end of the year and you’ll want to gather up all your info so that come tax-time you’re ready. I have a file that I throw everything tax-ish into through the year, but lots of people don’t have a single thing organized. While April is typically Tax Month, if you’ve been receiving a tax refund when you file, there’s something you need to do NOW!
I know it’s exciting when you fill out your tax return and find that the tax man is going to send you back a whopper of a tax refund. You want to get up and do a little dance, right? Well, you’re a dope. And here’s why. Since you’re getting a refund it means you PAID TOO MUCH TAX. That means you gave the government an interest free loan.
I’ve actually had people tell me that they like getting a refund because it’s “forced savings.” Are you kidding me? Savings on which you earn nothing for the year, while you struggle to come up with the money to achieve the goals you’ve set with yourself? You probably really like the Bank The Rest idea too, right?
Ya know what? If you want to be mindless about managing your money, there are lots of people who are willing to help you be mindless and make a profit off you at the same time. But if you’re tired of not being in control of your money, today’s the day to make some changes.
Here’s a form that very few people use, but is remarkably useful for keeping money out of the government’s hands: Form T1213. This form let’s you request permission from the Tax Man to have your employer reduce the amount of income tax taken off of your paycheque every month.
If you can demonstrate that you’re eligible for certain recurring deductions that will reduce your tax bill at the end of the year – you can trade in your tax refund for more take-home pay. Do you make monthly RRSP contributions by way of pre-authorized withdrawal? You’re eligible. How about child-care expenses? If you’re tithing monthly you can do it for your charitable donations. If you have rental losses, interest expenses on investment loans or carrying charges, those are eligible too.
Fill out Form T1213 and get the Tax Man’s approval and instead of paying extra tax and getting refunded, you’ll pay less tax on an ongoing basis so you’ll have more cash to use to pay down debt, build an emergency fund, save for your kids’ education, contribute to an RRSP, save for a downpayment on a home, whatever it is you want to achieve.
You’ll have to fill out the form and send it to the Tax Man each year. You can do it at any time, but the best time is in October or November for the following year. Once you’re approved, the Tax Man will provide instructions by letter to you, which you then give to your employer, who will adjust your pay for the remainder of the year.
Getting a tax refund may feel good, but when you think that the government has been using your money without paying a red cent in interest, you’ll realize that taking control is way more satisfying. Get the form, fill it out, and Keep Your Money!
December 16, 2008 at 9:11 am
you’re right Gail… nothing is free here in Canada…
December 16, 2008 at 9:26 am
Gail – what do you suggest for those who do freelance? This year, to make some extra money to cover home improvements and a trip, my partner is doing freelance editing work in addition to the full-time job. The struggle for us is to figure out how much to set aside for taxes… She throws extra money into RRSPs from that income and I have some medical deductions from my braces. We know we can claim part of the house since the spare room is used solely to freelance work. But is there a rule of thumb? My stepfather/tax-return accountant gave a ball-park around 25-30% but noted it depended on several factors…
December 16, 2008 at 10:24 am
I need to send this to my husband-he gets annoyed when I want to use our tax refunds for debt repayment or savings. He thinks they are a free pass to have fun! Thanks for the suggestion-if I use this form, I can get the extra money to do that all year, and then we don’t have to debate what to do with the big sum when it arrives!
December 16, 2008 at 11:20 am
Wow – I had no idea you could use that form to deduct the taxes you pay year-long. It has *always* angered me that the government gets to take my money all year long and then gives it back with no interest! How unfair is that? Now that I will be starting my own business, things will change, but I will definitely have my partner file one of these forms. Really terrific news.
Can we file it in January, Gail? My partner starts a new job in the new year.
December 16, 2008 at 12:13 pm
Wow, I had no idea. My hubby will be going incorporated started January for his film production company. Something for us to keep in mind. Thanks Gail, I love your show and have learned so much already.
December 16, 2008 at 12:29 pm
My husband gets paid salary, and the pay should be the same every week, HOWEVER, his pay is always different. I own my own business and therefore have done payroll, and correct me if I’m wrong, but if you get paid the same amount every week why would the controller take different amounts every week??? (by the way it is his ex-mother-in-law who makes different rules according to who she likes…) Am I the crazy one???
December 16, 2008 at 1:03 pm
I’d rather err on the side of caution and get a refund, than be wrong and end up having to pay tax unexpectedly at years end.
michelle,
I get paid the same gross amount each week, however net varies based on whether there is a benefit deduction, CPP, union dues, etc. They tend to alternate, ie benefits every other pay, but some like union dues are monthly.
December 16, 2008 at 1:31 pm
Thanks! Although he is not in the union..I was more worried that his ex-mother-in-law was taking him for a ride. I am soo addicted to this site…I can’t get enough info!
Thank you, Thank you!
December 16, 2008 at 1:56 pm
“I’d rather err on the side of caution and get a refund, than be wrong and end up having to pay tax unexpectedly at years end.”
Agreed. I’ve had that experience before, and it is not fun.
December 16, 2008 at 2:12 pm
My employer offers a great program for RRSPs. You can contribute automatically out of your paycheque, and then you don’t have to pay tax on it. It means you don’t get the year-end refund, but as Gail says you’re not overpaying on taxes. Plus, because no tax is being taken off, it means when you put $100 in you’re only losing $60-$70 from your net pay, so you can save more. I love-love-love this plan!
December 16, 2008 at 3:46 pm
Gail, you said that the best month to fill the form is October or November. We’re almost in January 2009. Is this a good time to request, or should we wait until next year to start?
Thanks!
December 16, 2008 at 4:14 pm
Being self-employed I PAY every year, and being an employee my husband gets a refund… it almost always balances out. The funny part is my husband is always annoyed at how LOW his refund is! I have tried explaining that the lower the better, but he really likes that “reward” for overpaying all year long, not sure why.
Gail, I notice you usually tell the TDDUP couples to apply their tax refunds to their long-term savings, theoretically they shouldn’t have any refund though, right?
December 16, 2008 at 4:33 pm
An even worse enemy than the tax refund – the tax reassessment. We had our moving expenses audited this year, when I got the notice I was not concerned as we had hired an accountant to do our taxes rather than do them ourselves as we usually do.
I am glad we had the emergency fund to pay the $1600 that Revenue Canada would like to have “immediately please”. I would have rather transferred the $1600 into a vacation fund or our house fund though!
December 16, 2008 at 6:11 pm
Michelle, what a downer! I hope they made a mistake and give it back to you quickly. Last year I got a notice as well – their mistake – and they reissued me a cheque a few months later when they realized their error (no interest of course.)
December 16, 2008 at 7:39 pm
Hi. I’m in the US and wanted to know what is the equivalent form of the T1213 in the United States.
December 17, 2008 at 6:38 am
Re: I’d rather pay too much than too little… Don’t be a dope! Stick the difference in a savings account and if you owe use that money to pay the gvt. If you don’t use the money to boost your savings. In the mean time you’ll have earned some interest on it.
Re: the best time to do it. Oct/Nov is the best time so you can have to instructions in place by January for the new tax year. If you haven’t done it by then NOW is the best time to stop overpaying.
Michelle W: I’m not a U.S. tax person, but from what I see at the IRS, all you have to do is go fill out an updated W-4 for your employer.
December 17, 2008 at 8:36 am
Gail, do you secretly have it out for Scotiabank?? lol! You seem to *dislike* the ideas they have… : )
Great post – as usual. Thanks for the info!
December 17, 2008 at 11:15 am
Last year the government reassesed my taxes: they thought they ought to tax my big government granted graduate scholarship because I wasn’t a student-sound absurd? How many people who aren’t students get big chunks of money from competitve scholarship programs? But I digress… Once I established that I was, in fact, a student, they reassessed again and sent me a cheque for an extra #350 wtih interest! Although it was a huge hassle, I enjoyed the end result!
December 20, 2008 at 11:17 pm
Michelle, You say you were reassessed, which means the expenses were disallowed. Moving costs are almost always reviewed, but they don’t reassess right away. They first request that you send the receipts. Did you do this? I am an accountant, and these requests always come to me rather than to the taxpayer. Is this your case? Or did the request go to the accountant? Were receipts sent in?
Susan
February 18, 2009 at 9:35 am
Michelle, CRA just picks on people sometimes though. It all started when I rented from a slumlord: CRA wanted my rent receipts, which my ex-landlord wouldn’t provide me. When I called to say he wouldn’t give me the receipt, CRA demanded that I get copies of every single check for the year, despite that I didn’t have the $95 in fees (”Better $95 than the $300 we want, right?” I don’t know, you could have helped me by sending a letter saying it is law that he must give me my receipt). The CRA lady let it slip that it was about him, so I spoke with other tenants. All of us whined that CRA then asked for our rent receipts for 4 years despite that every year we proved every penny.
Finally, I had a year off of their scruntiny. My T4 gets lost in the mail, the duplicates aren’t arriving and the deadline looms, so I pull out my old paystubs and calculate the numbers myself. A few stubs were missing, so I estimated based on previous stubs and turned out to be off by >$10 on 3 lines. I filed a T1 Adjustment and sent in my math and the receipt, thinking it should be clear by now that I endeavour to be accurate. They pulled my file again and I had to prove everything they don’t automatically get a receipt for: public transportation costs, rent, disability equipment purchases… Back in the loop again for a few years.
The lesson: once you have been pulled, whether for suspicion or as a random sample, you will be forced to jump through their hoops for 3-4 years of having your return matching to the penny of what you can prove (that countdown doesn’t start until your numbers are exactly right- mine have been, friends have not). Even if you’ve gone through this every year (except one) for your entire tax-filing life and always receive that letter at the end saying no adjustments we made, you will be stuck in that loop for years.
At least since I get pulled every year, my records are immaculate. For example, I use to never ask for a rent receipt unless I needed it (why put them through the paperwork when you have cheques an they’re honest), but now I asked for a receipt every year, December 15th, like clockwork.
February 20, 2009 at 9:55 am
My husband and I get a large tax refund each year $5000 plus because we are able to claim many expenses. This money is used to pay car and house insurance for the year, property taxes etc. If we were to pay less tax and get the money weekly it would still be used to pay the same things…not having monthly payments for these things makes my life much more pleasant. There’s a fee to have monthly payments for insurance so any interest is eaten up by the fee. What we don’t do is buy frivolous items with our pseudo windfall.
February 16, 2010 at 1:57 am
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