Stop Lending the Government Free Money

Do you look forward to tax season where you end up getting a big fat cheque from the government after filing your taxes? If so, then you have been paying too much in taxes and lending the government free money.

Withholding tax

The income tax rate is calculated by your employer and is deducted at the source. If you contribute to your RRSP (or similar tax-deferred accounts) during the tax year, you end up getting a refund at the end of the year since the tax is deferred to whatever amount you contributed to your RRSP.

For e.g.: Say, you contribute $100 each month to an RRSP account. When the tax season comes around and you file your taxes, you end up getting a tax refund for whatever amount of taxes were applied on that amount = ($1200 x Your Tax Rate).

You are paying too much in taxes to begin with – leaving you with a smaller take-home paycheque. You are lending the government interest-free money for a year! That extra amount that you have paid could have been growing tax-free in your investments and when you consider how compound interest works, you realize how much of your income you are missing out on.

The Solution

The solution for this is listed below:

  1. Complete the CRA form: T1213 – Request to Reduce Tax Deductions at Source.
  2. Provide proof: You need to provide CRA the proof that you are contributing to an RRSP or RESP or equivalent tax-deferred accounts (TFSA does not count) and request that your tax deductions be reduced. The proof can be an confirmation letter from your financial advisor or printouts from your self-directed investment contribution accounts showing that you make monthly contributions or you can make a lump sum contribution and attach that as proof. Be clear in indicating the amount that you want reduction of taxes for.
  3. Wait for a confirmation: It normally takes 2-6 weeks for CRA to send you a confirmation letter letting you know whether your request is approved or not.
  4. Submit  to payroll supervisor: If approved, submit a copy of the CRA letter to your payroll supervisor and they will take care of the rest. Your next paycheque will be a comparatively bigger paycheque (the amount depends on how much you contribute(d) in the tax-deferred account).

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Expenses – Gas

I have cut down my gas bill in half by telecommuting! With the rise in oil prices, I have been looking at options to cut down on the gas expenses. I work as a software designer and have the flexibility of working from home whenever I want.Being a relatively new job to which I switched last year, I used to still go into office every single day. Starting May 2013, I started getting a bit more comfortable and confident with my job and decided to work remotely atleast 2-3 days per week. This resulted in cutting down my gas bill by almost half.

The red bars in the chart below are weekend road trips and a one-time cost. The blue bars indicates what I normally spend on a monthly basis – which starting May has been cut in half (almost).

Reduce Gas Cost
By working from home, not only have I been able to cut down on the gas costs, but I also save my car from wear & tear and depreciation due to mileage.
The savings are not only monetary. By working from home, I save time as well. My commute distance to office is approximately 50 Kms bi-directional. On the days that I do drive to work, I spend about 60-90 minutes on the road which could have been spent being productive or sleeping in 😉
Do you telecommute? What has your experience been and how much has that resulted in savings?

Expenses – Banking

I envy the Americans. Banks competing, and paying bonuses for their customer’s business caught my eye on BusinessInsider recently. The American banks, in my opinion have much better packages than their Canadian counterparts. Even Canadian banks like TD operating in US offer the customers free chequing accounts with zero balance, something that is unheard of, in Canada, unless your account holds a minimum balance totaling a couple of thousand dollars.There are only a couple of small banks in Canada (although both were bought by the Big-6 recently) which really allow you to have free accounts without maintaining any balance: PC Financial and ING Direct. PCF is owned by CIBC and ING is owned by Scotiabank. Problem with PCF is that your cheques are on hold for a period of 5-days, unacceptable in my opinion.

My Story

I had been a Royal Bank of Canada customer for over 10 years and paid $4/month without fail. Rain or shine, I paid the fees to the bank to hold my own hard-owned money. I finally decided that it was time to switch and started looking around and found that ING has the best package out there. Some of the feature include:

  • Free banking – there are no fees whatsoever
  • Free chequebook (first 100 cheques)
  • Free ABM access on the Exchange network
  • Free e-mail money transfers
  • Free overdraft protection upto $250
  • Better interest rates than most other banks
  • Plus they have an added incentive periodically. For e.g., when you switch your payroll, you get a $100 bonus.

Some may see ING as a hurdle since its mostly a self-serve bank. I do most of my banking online and seldom had to go into a branch and did not see this as a hurdle and perfectly fits my needs.

With the switch to ING, my annual banking costs have gone down from $48 to $0.