Have I got a deal for you! You give me $1200. I will keep it very safe for you for 1 year and at the end of 1 year, I will give you your $1200 back with no interest.
You probably figured out that while this is a good deal for me, it is not a good deal for you. I'm giving you no interest, just your money back. What's interesting is this precisely happens when you get a tax refund. If you are like most Canadians, you are probably hoping for a tax refund and the bigger the refund the happier you are. Yet, the more money you get back means the more money you lent to the government interest free.
The reality of a tax refund, is it is not free or bonus money. It's your money being given back to you. It's time to change the way you think about tax refunds and getting less is better than getting more.
Rick and Jack
Let's look at the story of 2 best friends Ricky and Jack to see how we can start getting our money back sooner instead of lending it to the government interest free. Let's start with the assumption that Ricky and Jack make the exact same amount of money, $5000 per month. And they both make RRSP contributions monthly of $300 per month.
For Ricky, his net paycheque is $3000 after all his deductions including income tax. At the end of the year, Ricky gets a tax refund of $1200 mostly because of his RRSP contribution.
Jack on the other hand decides to take his tax refund early by filling out a T1213 form. Instead of a net paycheque of $3000 per month, he now gets a paycheque of $3100 per month and as a result, he will not get the $1200 lump sum at the end of the year. Instead of giving the government the extra $100 per month interest free, he now gets it in his pocket and can use it as he wishes.
Jack, like many people, would prefer getting the $1200 at the end of the year otherwise he would never save the money in the first place. So Jack decides he will have $100 automatically come out of his back account every month the same day he gets paid. That money goes into a high interest savings account making 4%. At the end of the year, not only does Jack have the same $1200 as ricky but he has an extra $25 of interest.
Ricky is quick to remind Jack “it's a lot of work for only $25.”
But think about it, if you found $25 on the ground today, would you walk past it saying it's not enough to worry about? Also consider that little differences of good discipline add up over time. Ricky like most people spends his tax return. After 10 years of this strategy, Jack's saving discipline will accumulate to $14,665. After 20 years, Jack will have over $36,250.
Get started today
All you have to do to get started is to complete a T1213 form. The strategy to save taxes doesn't just apply if you make RRSP contributions. You can qualify for less tax to be taken off if you have child care expenses, support payments, employment expenses or other deductible expenses. Go to www.cra.gc.ca, download this form, compete it and start collecting your tax refund early.
It's time to change the way you think about tax refunds. The less you get back, the better off you are. Start a new plan to manage your cash flow more effectively and remember, every little bit adds up to make big differences over time.