Sometime in April 2015, I logged into my bank account and saw the CRA had deposited over $7,200 into my checking account. My tax refund had come through. I did a little jig and then slapped myself across the face for putting myself in that position.
In my younger student days, I used to relish tax refund season. After all, it was the only time of year when I could become hundreds or thousands of dollars richer overnight. I would then take that money and waste it on something stupid, like new running shoes or clothes. I remember telling my sister, with her raised eyebrow: “I didn’t have this $200 yesterday, so why do I need it today?”
Since then, I’ve come to realize that tax refunds, while pleasant, are not all what they’re jazzed up to be. If anything, they’re a lame excuse to pat yourself on the back or go out and buy something useless. Let me tell you why:
You’re lending money for free.
What would you prefer? A $10,000 prize awarded in 12 months or $10,000 amortized bi-weekly for a year starting today. If you’re a saver, you know the latter is the smarter choice because every dollar in your pocket today is worth more than the dollar you’ll receive tomorrow.
Anytime you receive a tax refund, it’s because you’ve effectively overpaid the government. The government quietly accepts your overpayment and does nothing until you ask for it back via your tax return. Even then, that refund will ignore any potential interest you could have earned had you had those funds yourself.
Conversely, when it’s the other way around and you happen to owe the government money, they ask for your money immediately and charge especially punitive interest rates if you’re late, even by a day. The government doesn’t lend money for free, so why should you?
It’s rightfully your money.
A tax refund is not a surprise influx of cash. It’s your hard earned money that you’ve slaved away for. Assuming the refund isn’t the full result of an RRSP contribution, the reason why you’re getting it is because you’ve overpaid your taxes. Whenever your employer deducts your taxes from your paycheck, it does so on the assumption that your salary is reflective of what you’d earn each paycheck for the whole year.
For those of us in full-time jobs that will work from January to December, this is not especially problematic. However, it becomes a problem if you are a student with employment income or have a disability or a dependent.
What can I do?
All the boxes you can tick when you start a job to pay less tax are featured on the CRA’s TD1 form. Auto-filled in is the basic personal amount of $11,635, which is the income you get tax free just by being Canadian. When I started working as a student, I made the mistake of simply signing the form and sending it in. There was nothing illegal about doing this, but I effectively was robbing myself of my own income.
By accurately filling in the TD1 form, you’re basically telling the CRA: “Hey, I know I’ll make X dollars at this job, but please remember I have these other things that qualify me for a less tax paying, so please don’t deduct my taxes right away.”
Filling out the form correctly was especially helpful for me when I was doing my MBA and ever dollar was essential.
What NOT to do?
Working multiple jobs and accidentally filling the form out more than once. The CRA doesn’t know you’re working more than one job. If they receive the form twice, they will double count your basic personal amount and other amounts and you could receive a hefty tax bill the following year.
But worst of all: don’t trap yourself into getting a massive refund. Forced savings or not, your money can do more for you in your pocket today, as opposed to tomorrow. Get it now and put it to work!