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Your tax refund
Monday, May 16, 2011
The Canada Revenue Agency said, according to an article published in a national newspaper last week, the average 2010 tax refund to date was $1,506. Your refund, on the other hand, is likely to be higher for two good reasons.
We get to claim the northern residents deduction which compensates us for our higher cost of living in the North. This two-part deduction consists of a standardize residency claim of up to $16.50 per day and a travel claim. We also receive the NT/NU Cost of Living credit - a cash refund - of up to $942 for the Northwest Territories and $1,200 for Nunavut. Together, these two power house claims can easily raise your tax refund above the Canadian average.
The point isn't to gloat over our higher tax refunds. It is whether fronting the government an annual interest-free loan is such a good idea?
Many financial commentators harp on the fact that receiving a large tax refund is a poor idea because the CRA pays no interest on your tax over-payment. You are smarter, so it goes, to reduce your monthly tax withholding in order to receive larger paycheques. The extra money can then be used to pay down your mortgage or invested wisely. It's tough to argue against conventional wisdom.
The math behind the larger-monthly-paycheques concept isn't really all that compelling. If you forego, say, an annual $3,000 refund and opted to invest the 12 extra $250 paycheques earning a return of three per cent, you will be a whole $49 ahead. This is hardly the path to untold wealth, especially when taxes will reduce the investment returns to a mere $34.
There is no fault in allowing the government to safeguard your interest-free loan during the year and relish the anticipation of an annual tax refund. Assuming the refund is large enough, you could do something tangible with it, like paying for a well-deserved vacation, contribute to a Registered Education Savings Plan, Registered Retirement Savings Plan, toss that into the new Tax Free Savings Account or make a satisfying lump sum mortgage payment.
In the end, it's not a question of making the better choice but a preferred choice. Using the government as a forced savings account can be a great idea if you live paycheque to paycheque. Having extra money withheld from your paycheques may be the only way you save.
If you rather have the extra monthly cash flow instead of an annual tax refund, you will have to work for it. Here are the two things you need to do:
The first step is to update your federal and territorial Form TD1, Personal Tax Credits Return. These forms, maintained by your employer, allow you to claim certain deductions and credits you are entitled but may have missed when you first completed them, perhaps years ago.
Step two requires the CRA's approval. You need to download and complete Form T1213, Request to Reduce Tax Deduction at Source (Google Form 1213) and submit it to the CRA for approval. Once approved, the form is returned to you which you then provide to your employer to reduce your tax withholding by including additional deductions such as RRSP contribution, childcare, donations or interest paid on investment loans, etc.
Andy Wong, CGA, CFP, is a tax consultant at MacKay LLP, Chartered Accountants, in Yellowknife. He can be reached at: email@example.com