Get your tax refund early
Getting a big tax refund means you paid too much money to the government, these funds could have been in your investment account growing but weren’t. Big refunds can cost you 10's of thousands in the long run but thankfully there is a simple way you can begin getting your tax refund a year early by filling out a T1213!
How to submit a T1213
The T1213 allows you to "request to reduce tax deduction at source". Basically you tell the CRA about all the tax deductions you plan on having throughout the year and they provide you a letter for your employer which authorizes them to reduce the amount they deduct. To complete this form:
- Simply go to this website or google "T1213 Canada"
- Download and fill it in digitally (or manually) including:
- RRSP contributions
- Employment expenses (T2200 expenses)
- Interest on investment loans
- Write a description detailing the associated deductions as specifed in the form
- Print out the form and mail it to the office specified for your province (at the end of the document)
The "annoying" part of the T1213 is you must fill it out every year. Usually you want to mail it in October/Novemeber and you should recieve your response by January to provide your employer payroll. Over all this process takes less then an hour and $1 in postage but as you see below it can save you far more.
Opportunity Cost of a tax refund
A Canadian making $60,000/year in Ontario has a marginal rate of 29.65% meaning if they contributed $10,000 to their RRSP they would get a tax refund of $2,965. If they instead filled out a T1213 their employer would have reduced the amount they were paying each month in tax resulting in an extra $250/month.
If you invested that $250/month in a growth portfolio you would generate nearly $100 in the year:
This may not seem like much but repeated annually for 40 years that $100 adds up to over $21,000:
In practice this is how I execute this strategy:
- In October look at your last pay stub and estimate what your reported income will be by EoY.
- Based on the estimated income you can calculate how much RRSP contribution room you will recieve for that year (18% of reported income)
- Budget what portion of your RRSP room I want to fill for the following year
- Fill out the T1213 with the amount budgeted for in step 3 and attach a letter to the CRA informing them how you plan to contribute $XX amount to your RRSP
- In about 6-8 weeks you should get an authorization letter from the CRA allowing your employer to reduce the income tax from source for the following year
- When January comes around begin earmarking the money for your RRSP each month (1/12th the amount from step 3) and deposit the funds into your RRSP.*
* Depending on your tax situation there might a slight benefit to investing the earmarked money in an unregistered account and only depositing it in the RRSP in February of the following year. This is adventageous if your marginal rate is at deposit and withdraw are the same (or very close) cause rather then generating tax free returns on only your portion of the RRSP you will generate returns on the whole amount (minus cap gains).
For example if you commited to a $12,000 contribution at a marginal rate of 30% your monthly earmarket money would be $1,000 but $300 of that is actually from the government. If you put that into a unregistered account (8% annual return) the government is effectively loaning you $300 each month that you need to "pay back" (deposit into your RRSP along with your portion) in January/February of the following year. The $1,000/month will grow to $12,449 by December and when you roll $12,000 it into your RRSP you will pay capital gains on $432 which will create a tax drag of $65 and leave you with $12,000 in your RRSP and $367 in your unregistered account, a total of $8,767 after tax dollars. If you put the $1,000 into your RRSP each month your RRSP would have $12,449 in your RRSP at the end of the year or $8,714 of after tax income. You come out ahead by $53.
Cognitive effect of using a T1213
The above projection is in the best case where you immediately invest your entire tax refund and have an opportunity cost of $21,000 over a 40 year period but in reality people spend their refunds more often then they save which can further impact your ability to save.
People spend "windfall profits" more frivolously then they would regular income, so more then likely out of those 40 tax refunds you will be tempted to splurge on some number of purchases you otherwise could have avoided if you simply didn't get the refund. The simplest way to reduce the burden on you and the chance that you squander your tax refund and fill out the T1213!