The good and bad of intaxification
If you've already filed your 2006 tax return, chances are it's because you are expecting a refund. If that refund makes you excited, you are suffering from a common disease known in the industry as "intaxification." Intaxification has been defined as the short-term euphoria one gets at receiving a tax refund -- it only lasts until you realize you are actually getting back your own money.
You can take some comfort from the fact that you are not suffering alone. More than half of Canadians who file a tax return get a refund.
But getting a tax refund is a sign of poor tax planning; you've loaned your hard-earned money to the government -- interestfree. A tax refund typically arises when the amount of tax owing on your return is less than the amount of tax withheld from your income during the year.
Employment income is the most common type of income from which tax is deducted at source. The amount of tax withheld by your employer is calculated without taking into account various deductions normally claimed, such as RRSP contributions or child-care expenses, which reduce your taxes payable.
Fortunately, by taking advantage of the "undue hardship provision" under the Income Tax Act, it's possible to get your tax refund throughout the year, on every paycheque, instead of waiting until your return is filed the following spring. To apply, you simply complete Canada Revenue Agency's one-page form, T1213 "Request to Reduce Tax Deductions at Source." On this form you indicate the various deductions or credits that, if not taken into account, would otherwise result in a tax refund for the year.
This form is then sent to your local CRA tax services office for approval. Once approved, the CRA will send you a letter of authority, which must be given to your employer, allowing the employer to begin deducting less tax at source.
Let's review Eli's situation. He will earn $69,000 in 2007 and contributes $9,000 to his RRSP. Based on 2007 Ontario tax rates, he would be eligible for a reduced tax withholding of about $240 per month.
If this $240 monthly savings is automatically redirected from Eli's paycheque into a systematic investment program, he won't miss the money because his net pay remains constant. The only difference is that instead of the money sitting with the government, it can be invested. Over a working career of 25 years, at a 7% annual compounded growth rate, the $240 could grow to nearly $200,000.
The best part of this sort of strategy? You won't receive another tax refund--and fall victim to intaxification. - Jamie Golombek, CA, CPA, CFP, CLU, TEP is the vice-president, taxation and estate planning, at AIM Trimark Investments in Toronto.