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.