Don't celebrate a large tax refund - Eliminate it!

Investment Insight

Every year, many Canadians celebrate the arrival of a tax refund. It feels like an unexpected bonus, a pleasant surprise among all the bills from the holiday season. In reality, however, a tax refund simply means that you paid the Canada Revenue Agency (CRA) too much tax throughout the year. You get your overpayment back as a Tax refund, but you are essentially making an interest-free loan to the government.

Keep your money in your hands

Fortunately, there is an alternative. If you inform the government that you will be making non-payroll RRSP contributions, for example, they will authorize a reduction in the taxes that are deducted at source by your employer. You can use this additional cash flow in a number of different ways – without making any dent at all in your take-home pay.

What you do with this additional cash flow depends on your situation and your goals. For financial security, debt elimination followed by wealth accumulation should be a priority over spending the ‘found’ money. If you have debt, target the debt with the highest interest rate first, then your mortgage.

There are many great ways to use your additional cash flow, consider:

Reduce your debt by:

Paying down your credit card or consumer debt

If you are carrying a balance on your credit card, the high interest rates can erode your savings. Reduce the cost of credit by paying down debt with the highest interest rate first.

Paying down your mortgage more quickly

Whether you have a traditional mortgage or a flexible mortgage with a line of credit, the value of reducing your principal sooner can be substantial. You can save thousands in interest costs and pay off your mortgage faster.

Review the terms of your mortgage contract and make use of all options available without incurring prepayment penalties.

Increase your savings by:

Maximizing contributions to your RRSP

Contributions and deductions that generate the tax reduction can be directed back into your RRSP contribution for the next year. The earlier you contribute, the longer you can take advantage of the tax-deferred compounding of investment income.

Contributing to an RESP

A Registered Education Savings Plan (RESP) allows a contributor to save money for a beneficiary’s post-secondary education on a tax-deferred basis.

The earlier you begin to contribute to an RESP, the more you will be able to take advantage of compounding investment income and also maximize government grants. A contribution of $2,500 can earn a $500 grant per beneficiary per year until the end of the year in which the beneficiary turns 17 and up to a maximum grant of $7,200.

Contributing to an RDSP

A Registered Disability Savings Plan (RDSP) is available to assist families in planning for the long-term financial security of their relative with disabilities. Early contributions to an RDSP benefit from compounding investment income and can also benefit from available government grants and bonds.

Topping up your TFSA

Contributions to a Tax-Free Savings Account (TFSA) allow the investment growth to accumulate and be withdrawn tax-free. Because TFSA withdrawals are added back to your available TFSA contribution room in the year following the year of withdrawal, there is flexibility in using the assets for mid to large purchases.

Establishing an emergency fund

It is important to have easy access to emergency money in order to cover unexpected events such as a job loss, an illness or a major home repair.

In other words, by putting the money that already belongs to you back in your pocket – and without adding a single cent of extra cash – you can be on your way to financial independence sooner.

Put one of these strategies to work

It’s not just RRSP contributions that entitle you to lower taxes deducted at source. The CRA allows you to claim child care expenses, alimony, maintenance or support payments, employment expenses, and interest expenses and carrying charges on investment loans, among other tax deductions, to reduce the taxes you pay throughout the year.

The application process shouldn’t take you more than a few minutes:

1. Fill out the CRA’s T1213 form, entitled Request to Reduce Tax Deductions at Source for Year(s) ________

Quebec residents must also complete and file form TP-1016-V Application for a Reduction in Source Deductions of Income Tax with the Quebec Ministere du Revenue to ensure they receive both federal and provincial source deduction relief.

2. Send it, or take it, into your local tax office (call 1 800 959 8281 or visit for the location nearest you).

3. Make sure the money you’re no longer sending to the government goes towards paying down your debt with the highest interest rate first, then your mortgage.

It’s that simple

The only disadvantage to this strategy? No more tax refund celebrations. The huge advantage? By lowering the amount of taxes that are deducted at source by your employer, you can put your money to work for you to eliminate your debt more quickly or increase your savings.

Contact your advisor directly for information about reducing your taxes deducted at source.

This is an image of Canada Revenue Agency's Form T1213: Request to Reduce Tax Deductions at Source. The actual form is available at the hyperlink on this page.
This is an image of Revenu Quebec's Form TP-1016-V Application for a Reduction in Source Deductions of Income Tax. The actual form is available at the hyperlink on this page.

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. The Manufacturers Life Insurance Company is the issuer of the GIF Select IncomePlus and Manulife PensionBuilder insurance contracts and the guarantor of any guarantee provisions therein. Manulife, Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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