Excited about the prospect of receiving a tax refund this year? If so, you are
probably suffering from a common, but seldom-diagnosed disease known as
"intaxification." Intaxification is the euphoria of getting a tax refund that
lasts only until you realize it was your own money to begin with.
And you are not suffering alone. A survey conducted last year found that 55%
of Canadians expected a tax refund, with the average refund being about $1,800.
Getting a tax refund is actually a sign of poor tax planning -- after all,
you've loaned your hard-earned money to the government, interest free, for up to
18 months.
A tax refund typically arises when the amount of tax owing on your return is
less than the amount of tax that was withheld from income you received during
the year.
The most common type of income from which tax is deducted at source is
employment income. The amount of tax withheld by your employer is calculated
without taking into account various deductions normally claimed on your tax
return, such as RRSP contributions, childcare expenses, or alimony and support
payments, which reduce your ultimate tax 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 entire 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, the
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 review and
approval. Once approved, the CRA will send you a letter of authority, which must
be given to your employer, authorizing the employer to begin deducting less tax
at source.
Let's take an example of an employee who makes $69,000 per year and who also
contributes $9,000 to her RRSP. Based on 2004 Ontario tax rates, she would be
eligible for a reduced tax withholding of $250 per month.
If this $250 monthly savings is then automatically redirected from the
employee's bank account into which her payroll was deposited into a systematic
investment program, the employee won't miss the money because her net pay
remains constant. The only difference is that instead of the money sitting with
the government, earning no interest, it can be invested. Over a working career
of 25 years, at a 7% annual compounded growth rate, the $250 of tax savings per
month can grow to $195,000 -- and this is in addition to any savings accumulated
in her RRSP.
And the best part of this strategy? You won't receive another tax refund --
money that is often spent frivolously, as if it were a windfall, when in fact it
was your money all along.