One of the more interesting discussions I run into with folks is about how they love getting big tax refunds in March and April. I always ask these folks one simple question, “Why are you so happy you just loaned the Government so much of your money?”. If you want to pay yourself first, why not make sure you get paid the most during the year and not waiting for April to get your money?
The response to this question is usually some nonchalant answer which ends the conversation, but I’ll ask you , good reader the same question, Why do you enjoy loaning the Government your Money?
If you know that you will be doing the following tax saving things over the year:
- Make payments to your RRSP
- Make donations to your favorite charity
- Your spouse who used to work, will not be working this year
- Someone in your direct family will be attending post secondary training and you will be claiming their tuition costs.
- You know you will be buying transit passes to get to work
And many others, why don’ t you take your tax savings right away, and have less taxes deducted from your pay? All you need do is call your HR/Pay Roll department and fill in the correct forms from the CRA certifying that you are doing this, and away you go, it is that easy.
What Do they Really Do With Their Refund?
Some comments I have heard from my original question are:
- I’d just squander the money, and wouldn’t notice the savings.
- I like getting a big lump, it’s like the government is  saving the money for me.
And other comments similar to this. If that is the case, simply set up an automatic savings vehicle (we’ll talk about that later this week), and do that. You’ll have your money in savings sooner, and earning growth for you sooner.
Do you loan the government money like this? Why not just pay yourself first?
You might need to persist when you ask about this. My first contact at HR had no idea what I was talking about – an indication of how few people actually do this!
Indeed, especially if your HR or Payroll dept. has been out sourced, then they really don’t help much.
Come tax time my husband and I actually hope we owe money – we both pay quarterly installments and if we owe it means we made more than the year before. I know we are strange.
No that makes sense to me, but I may be strange too!
Not only do I NOT do this, I do the opposite. I have a fixed amount taken every check that isn’t enough to possibly cover my tax bill by the end of the year. As long as your tax bill isn’t over $3000 then you aren’t forced into quarterly installments. This way, the govt gives me a free loan, not the other way around.
Unfortunately, I don’t have that option. I am forced to ‘loan’ the government money by virtue of a one-time payment my employer makes, once a year, of which I lose half to taxes.
So you get paid once a year, and your employer deducts all taxes at that moment? Interesting payment method.
Oh, I read to the bottom and you have addressed my argument, though I still think poorly. Automatic savings vehicles will never produce the same thought patterns as a smaller paycheque.
Depends on the individual, I’ll elaborate more during the week, but you can create artificially low income in many different ways.
Doing your TD1 properly is great if you’re someone who thinks a lot about money, but I think for most people loaning the government money isn’t a bad thing. For a lot of people, having an extra $10 per week will make no difference in their lives and they won’t be able to account for what they got for it. But give them a cheque for $520 and they’ll actually put it to some use, either with a large purchase they’ll remember, or by saving it appropriately.
Actually, I think even for most people who do think about money, keeping your net pay artificially low helps to keep lifestyle inflation in check. It’s not true for everyone, but I do question the wisdom of advising everyone to reduce their witholdings.