When you started that first job and annually ever since, you may have been handed a series of tax forms to help your company's payroll department understand how much tax you wanted deducted from your gross pay.
This involves actually knowing about and indicating which "personal tax credits" you qualify for. Most people don't understand what this means, and looking from the incomprehensible tax terms on the forms, to their rushed payroll clerk, they are often given the following response to their "deer in the headlights" expression: "Just claim single; you'll owe nothing more at tax time."
And with that advice, inferring of course that you may not be able to save any sum, let alone enough to pay your taxes, it becomes an accepted habit for life to overpay the taxes your employer deducts at "source", that is from your gross pay! Unfortunately, this is one of those decisions that can put you at great financial peril.
People would have a better chance of paying all of their bills and saving for their future if they weren't losing control of so much of their gross pay. In recent years the average tax refund is significant: over $1400, or $120 a month. This is money you essentially loan to the government without being paid any interest in return.
Put another way, it's like owning a rental property, having tenants and then not charging rent!
Over a 40 year working life, $1400 a year would grow to an accumulation of $56,000 before interest is earned. When you assume an average interest rate of 2% that money would grow to over $75,000-more than the average amount most people have in their RRSPs today. Inside an RRSP, earning the same rate, that refund would grow to over $86,000. (Investing the same sum inside an RRSP at a 5% average rate of return, the money would grow to close to $180,000! You can see that interest rates and tax sheltering inside an RRSP matter a lot.)
It is clear that this average tax refund, invested in your hands instead of the government's, is extremely lucrative due to the basic effect of compounding over the lifetime of an average worker. Change the game: pay only the correct amount of tax on your income sources by being in control of more of your employment earnings first. Here's how:Reduce your tax withholdings on your income sources; complete the forms, properly
To reduce your tax withholdings you'll be doing two things: first, telling the government about the personal tax credits you are entitled to in reducing your taxes. Second, you'll tell the government about certain allowable deductions you will have this year.
If you need help with any of this talk to the person who did your tax return, as they can tell you the exact amounts for the current year. Most personal tax credits are adjusted for inflation every year, and so their values will change. Ideally you should revisit the personal amounts available to you at the end of the current year, in December, when the new forms for the next year are available and you have a chance to do some year end tax planning. Be sure to indicate every credit and deduction you think you'll be entitled to.Recover Overpaid Instalments
Certain people have to pay income taxes by making instalment payments. For 2008 and subsequent years, to qualify for quarterly instalment payments taxes payable after you file your tax return must be over $3,000 for the current year or either of the prior two years. This can happen when taxpayers report income from self-employment, investments, or other sums from which tax is not withheld at source.
Farmers and fishers, will make one instalment payment by December 31, but only if the actual tax owing for either of the two preceding years does not exceed $3,000.
When taxpayers fall into an instalment profile, they will receive a regular billing notice from CRA reminding them about this, based on their taxes payable of the immediately prior two years. Trouble is, if income has fallen since then, instalments may no longer be necessary. Yet many people keep paying the request for instalments sent by the CRA, instead of using or investing that extra money for themselves.
Good news: you can request an adjustment to change your instalment remittances by writing a letter and requesting instalments be calculated under one of two other options:
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