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moneysense.ca, 22/03/06
Overwithholding
I am in the process of doing our taxes using QuickTax and the good news is we are getting a big fat refund from the Canada Revenue Agency. The bad news is we have given the government an interest-free loan. Sadly, the tax refund is an annual occurence as we use up the entire RRSP contribution room religiously every year.
To find out how much the interest-free loan cost me, I ran a quick calculation: Let’s say I am expecting a $6,000 refund on my taxes, which works out to $500 per month. I am also assuming that I can get a 5% risk-free, tax-free return by making a lump-sum prepayment on our mortgage. That works out to $216.45 in lost interest over a period of 15 months.
Since, every little bit adds up, I am going to file T1213 with CRA to reduce my tax deduction at source. It is amazing how sheer inertia could cost you money (I’ve been meaning to file T1213 every year but somehow never get around to it).
moneysense.ca, 22/03/06
brilliant tip. I’ve lost out on about 400 bones a year for the last 4 years or so. Although it’s nice getting that fat little bonus every year
I filed one for the 2006 tax year because I set up a charitable donation through payroll deduction and it was large enough that I would get about 30% of it back in taxes over the entire year. I got a letter back from the CRA stating that my request was denied because the extra tax I was paying wouldn’t cause me ‘undue hardship’, which is true but that’s my money! I don’t want them to have it until next spring.
We did that in 2005 for my wife who has a ton of tuition credits. We haven’t bothered to do it for this year, just too lazy to do it.
You’re a life saver! I saw this tip in a book but couldn’t find the form anywhere in the CRA web site.
Perhaps a more relevant comparison would be appropriate. You are, in effect, loaning money to the government. The question you should ask is how much they would pay for that loan normally. Here’s one nice reference for US T-bill rates (http://www.nscb.gov.ph/stats/tbills.asp). It covers the rates month-by-month for 91, 182, and 364-day maturities. Although you can’t structure your overwithholding to exactly fall into those buckets, you can come close enough. Put the first 3 months into 364-day bonds. The next 3 months go into a 182-day followed by a 91-day. And so forth.
I disagree with the experts. I like getting a refund. Here is the reason why: most people lack the discipline to save. Of course, I save using an automatic deposit plan. But I consider my tax refund a windfall and for some reason when it comes in a lump sum, it seems so much more satisfying and usable. What’s the trade-off? A hundred bucks in lost interest. Big deal.
The government only gets it for a year and then it’s mine and it’s substantial and it gets invested at this time.
http://sittingprettyfinancially.blogspot.com/2006/02/over-withholding.html
Nina, I was thinking the same thing. We did this for my wife last year. I honestly can’t remember what we did with the extra money that was no longer in the government’s hands. We didn’t have our finances in order last year mind you, but I’m pretty sure some or most of the extra cash went to expenses. The refund, when it comes in April 2006 on the other hand, will go straight to our line of credit. Forced savings is a wonderful thing.
Nina, Dave: Yes, I realize that for some people a refund is like a forced savings plan and a few hundred dollars in lost interest is well worth it. Personally, I would favour not getting a refund and getting my money to work immediately. Whatever works for us, right?