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Tax Refund – Good News or Bad
So you receive a tax refund. A lot of people consider that a good thing, however the reality is that a tax refund means you have paid the Canada Revenue Agency (CRA) too much tax through the year. In reality you are giving the government an interest free loan.
You shouldn’t have to wait until spring to get the money back – that you loaned the government. Fortunately there is a way to correct this problem.
If you have non-payroll Registered Retirement Savings Plan (RRSP) contributions, childcare expenses, interest expenses on investment loans, maintenance or spousal support payments, charitable donations or rental losses, you can reduce the amount of tax deducted at source by your employer. Simply complete CRA’s Form T1213, “Request to Reduce Tax Deductions at Source,” a straightforward one-page form, and send or take it to your local tax office. Once approved, CRA authorizes your employer to deduct less tax from your pay. Call 1-800-959-8281 to find the tax office closest to you.
As an example, let’s assume you are contributing $6,000 per year to RSP’s and have childcare expenses of $5,000 per year. By filling out Form T1213 you could have an additional cash flow of between $250 and $350 per month depending on the province you live in and your income. That’s money you normally would have given the government as an interest free loan.
So what can we do with our new found cash flow? There are several options.
- Pay down debt on your credit card if you are carrying a balance.
- Pay down your mortgage more quickly. Whether you have a traditional mortgage or a flexible mortgage with a line of credit, the value of reducing your principal sooner can be substantial. You can save thousands in interest costs and pay off your mortgage more quickly. Review the terms of your mortgage contract and make use of all options available without incurring prepayment penalties.
- Maximize RRSP contributions or top up your TFSA (tax free savings account). The earlier you contribute to either of these investment vehicles the sooner you have compound growth working for you.
- Contribute to a RESP for your children. A Registered Education Savings Plan allows a contributor to save money for a beneficiary’s post-secondary education on a tax-deferred basis. The earlier you begin to contribute to an RESP, the more you will be able to take advantage of the compounding investment income and government grants. A contribution of $2,500 per year can earn a $500 grant per year until the end of the year in which the beneficiary turns 17, up to a maximum grant of $7,200.
- You may even want to use that money to save for your next holiday, and it obviously means more if you start today rather than wait until April or May when you normally would have received your refund.
It only takes a few minutes to fill out the necessary forms, and you could be well on your way to putting extra cash in your pocket - money that already belongs to you.
I can help you. Call me today.
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