A Bird In The Hand.. (A Tax Tip)

a bird in the hand

Would you lend money, interest free, week after week to a friend or family member who is perpetually in debt, continues to over spend, and has no real plan for paying any of it back? Of course not, but many of us do every day without even realizing. It’s called income tax.

This is the time of year when most of us receive our T4 slips from our employers and begin filling out our income tax returns. I know many of you myself included, look forward to getting a refund so that we can make some much needed repairs to the house, take a vacation or pay down some consumer debt. But have you ever really stopped to consider what that refund really means?

The truth is if you’re getting a refund it means you overpaid your taxes! The government gladly kept your money interest free for up to a year. Think of how much could have done with that extra cash if you had been able to keep it right from the start.

Now I know that for a lot of people, getting a tax return is seen as a bit of a forced savings plan and if you can’t save money any other way I understand the appeal but let’s get real for a minute. By taking that same amount of money and putting it in an interest bearing account for the same amount of time you would have saved more money.  For some that could add up to a lot more over the years.

So how do you prevent from giving the government an interest free loan? Reduce your payroll deduction.

Contrary to popular belief there is no law that says your employer must deduct income tax on from your cheque. They must deduct CPP (Canada Pension Plan) and Employment Insurance (EI) but they are not required to deduct any taxes. Don’t get me wrong, you are required to pay taxes but your employer is not required to help you. If you don’t pay taxes by payroll deduction you will definitely get a bill just like if you were self-employed or an independent contractor.

Most employers follow a simple formula based on your income and the marginal tax rate of your province but they know nothing of your personal situation and other credits and deductions you may be eligible for and that’s why so many people end up overpaying. If you’re getting a refund it should be simple to figure out. Speak to your HR department about reducing the amount they deduct to be more in line with what your actual tax liability is. In this way you will lower your refund and keep more of your money in your pocket for longer. A bird in the hand is worth two in the bush so to speak, just like money now is better than money later.

The goal here is to end up with a tax return that is as close to zero as possible. Nobody wants a huge bill but a large refund is just as much a sign of poor planning. You can’t avoid paying your taxes but you can and should do everything in your power not to pay too much.


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