Monday, April 27, 2015

5 Minutes And A Stamp Can Save You $70-$160/year - Stop Lending The Government Free Money


The Pen Is Mightier Than The Taxman - Reducing Withholding Taxes At Source

Well, it's tax time again in Canada. There's many ads for different tax preparation firms and software, all advising the "fastest way" to get your tax refund.

What if instead of getting a refund, you got your money right away? As you earned it? What if the government simply took less off your pay cheque?

The True "Cost" of A Refund

By waiting to get your refund, you're missing out on interest, the opportunity to invest that money in stocks, or money you can use to pay down loans.

Let's look at two examples: an individual earning $60,000 and one earning $100,000 per year.

I used a SimpleTax calculator, and assumed each individual has no children, is age 30, the person lives in Ontario and no other income outside employment income.

Let's assume both manage the typically recommended 10% contribution to their RRSP.

Our $60,000 earner:
  • Owes $11,809 in taxes prior to RRSP (this is how much the employer would deduct)
  • After $6,000 RRSP contribution, owes $9,940
  • RRSP results in a refund of: $1,869
The $60,000 earner can get that in April 2015, or could get $71 every two weeks through 2014 if less was taken off at the source.

Our $100,000 earner:

  • Owes $26,440 in taxes prior to RRSP
  • After $10,000 RRSP contribution, owes $22,099
  • RRSP results in a refund of $4,341
Again, the $100,000 earner can get that in April 2015 or could get $166 every two weeks through 2014.

So What? - The Time Value of Money

Hopefully, right away the idea of $71 or $166 every pay cheque over a year sounds better than waiting until April of the next year. If it doesn't, consider the value of that money if it was invested.

For this, I'm going to rely on some good old GoogleDoc Spreadsheets!

For the full spreadsheet, take a look here, but assuming a 7% return, the $60,000 earner, is missing out on $70 per year, and the $100k earner is missing out $160 per year.

How Do I get Withholding Reduced At Source

Remember: I'm not a tax professional. You should research this yourself or talk to a professional, but in the examples I used, if you're someone who is going to make an RRSP contribution, then simply filling out this form means you get money back during the year. Instead of next April. Here's a screenshot of the form, which should take less than 1 minute to fill out:


If you claim you're going to contribute $6,000, make absolutely certain you do. If you say you have no, or $500 of other income, make sure that's an accurate or conservative estimate. If you end up owing a lot of tax because you failed to make your contribution you said you would, or you have lots of other income you forgot about, then you will be in trouble.

Originally published 2015-04-27


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