Q. I’m making monthly deposits into my RRSP. This includes my regular RRSP contribution and the repayment of my home buyer’s plan. I end up getting a tax refund in the spring and have heard that this is not a good strategy. Would greatly appreciate your advice.
Sonia, Glebe
A. Don’t get me wrong. I’m a big fan of tax refunds, particularly when you compare it to the alternative. However the euphoria of a tax refund quickly vanishes, when you realize it’s just your own money that you are getting back anyway.
The strategy that you are referring to is called lowering your tax deductions at source and it works like this.
It begins with filling out form T1213 (ask your financial planner or download from the Canada Revenue Agency (CRA) website).Complete and send in the form requesting approval to have your employer withhold less tax every month. Once the government approves the form, it will send you a letter to give to your employer that will allow them to withhold less tax each pay cheque. Essentially what this does is let you trade in a big tax refund for more take-home pay on a regular basis. Instead of paying extra tax and getting a refund, you’ll pay less tax on an ongoing basis. This frees up extra cash that you can use for a regular investment program, for debt reduction or to contribute to that RESP or TFSA.
Note that only the regular (deductible) RRSP contributions will be factored in with this reduce tax withholding. As the RRSP Home buyer’s repayments are not tax deductible, they are not considered in this strategy.
Although most people try to implement this strategy before January 1, you can apply and implement this at any time of year, once approved.
Other expenses that CRA might consider include child care expenses, interest expense deductions (on leveraged investment strategies), charitable donations etc.
This article provides general information and does not constitute financial or other professional advice. Seek independent advice before implementing any of the strategies discussed.
Imran Syed, BA CFP CFSB TEP is an independent, Fee Only Certified Financial Planner and can be reached at www.feebasedadvisor.ca. Please send any home related, financial planning questions to him by email at homes@ottawacitizen.com
