I don't want a refund, the goal should be having taxes owing

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Peculiar_Investor
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I don't want a refund, the goal should be having taxes owing

Post by Peculiar_Investor »

So I'm reading through What to do once you’ve received your tax refund: Pape | Toronto Star. I'm amazed that nowhere in the article does Pape mention that getting a refund means that you've been giving the government an interest free loan for the past year because you've overpaid your tax obligations at source.

While the idea of getting a refund from the government sounds attractive, think about it for a second or two. A refund is generally just taxes you've overpaid during the year, i.e. a return of your capital or an interest-free loan to the government.

My tax goal every year is to have a small balance owing (under the CRA $3000 threshold) rather than planning for a tax refund. If/when I get a tax refund, what I do is walk back through our tax returns and determine what caused the overpayment of tax obligations at source that contributed to the unwanted refund. Step one would be looking at your TD1 - 2017 Personal Tax Credits Return. Are you claiming all the available credits?

Is the refund a result of annual RRSP contributions? Consider filing a T1213 - Request to Reduce Tax Deductions at Source based on the annual RRSP contributions. The T1213 also allows reductions based on other deductions, credits, or non-refundable tax credits that are not part of the Form TD1, Personal Tax Credits Return, such as Medical expenses, charitable donations, and carrying charges.

If you take this approach, both the TD1 and T1213 need to be filed annually.

Bottom line from my perspective, tax owing when filing our tax returns is a good thing, a refund is generally something to be avoided.
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Re: I don't want a refund, the goal should be having taxes owing

Post by big easy »

Peculiar_Investor wrote: 28 Apr 2017 10:38 My tax goal every year is to have a small balance owing (under the CRA $3000 threshold) rather than planning for a tax refund.
This is to avoid the CRA requirement of paying taxes by quarterly instalment. If you are self employed (or have other income without tax withheld at source), can you make a voluntary installment to CRA on December 31 to reduce tax payable to below $3,000 and therefore avoid being forced to pay quarterly instalments in the following year?

Agree with the the post. I never understood why people are so thrilled to get a tax refund.
Last edited by big easy on 28 Apr 2017 11:43, edited 1 time in total.
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Re: I don't want a refund, the goal should be having taxes owing

Post by SQRT »

Your rational makes sense but would be more valid if interest rates were higher. I've generally decided to simply pay their instalment requests knowing that it will result in overpaying. Just got my refund which was mid 5 figures and higher than usual. Because of large cap gains in 2015 that didn't repeat in 2016. I do this to ensure I don't pay penalties if I suddenly decide to realize big cap gains late in the year. If rates were higher I might not do this.
Last edited by SQRT on 28 Apr 2017 13:30, edited 1 time in total.
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Re: I don't want a refund, the goal should be having taxes owing

Post by CROCKD »

Although I agree with the sentiment expressed by PI, the approach of SQRT is what I do. Installments give you the option of 3 approaches. The one year I decided not to go with the option of paying what is asked and instead estimated an amount and paid it I was charged interest. So from then on I pay what is asked. I got a small refund this year in the mid 3 figures.
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Re: I don't want a refund, the goal should be having taxes owing

Post by DavidR »

big easy wrote: 28 Apr 2017 11:38 If you are self employed (or have other income without tax withheld at source), can you make a voluntary installment to CRA on December 31 to reduce tax payable to below $3,000 and therefore avoid being forced to pay quarterly instalments in the following year?
Nope. Suppose you think that you will owe $3,900 so you send $3,000 in December.
When they assess your return, they'll see that you had more than $3,000 of tax (after considering the amount of tax paid by source deductions). So you've crossed the threshold.
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Re: I don't want a refund, the goal should be having taxes owing

Post by big easy »

DavidR wrote: 28 Apr 2017 13:30
big easy wrote: 28 Apr 2017 11:38 If you are self employed (or have other income without tax withheld at source), can you make a voluntary installment to CRA on December 31 to reduce tax payable to below $3,000 and therefore avoid being forced to pay quarterly instalments in the following year?
Nope. Suppose you think that you will owe $3,900 so you send $3,000 in December.
When they assess your return, they'll see that you had more than $3,000 of tax (after considering the amount of tax paid by source deductions). So you've crossed the threshold.
Thanks David
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Re: I don't want a refund, the goal should be having taxes owing

Post by Peculiar_Investor »

I realize that those in, or near retirement are subject to fewer source deductions or withholding of taxes. The challenge for this group is managing the required tax instalments, as a few posters have mentioned. For the most part these taxpayers have direct control over their taxable events and tax payments, so understanding how the tax instalment system works and it's implications is very important. But I'd suggest that's a topic for another discussion.

My concern is a bit more mainstream, for those taxpayers who are subject to source deductions and withholding of taxes at source, think employee. The levers available to these taxpayers is their TD1 - 201x Personal Tax Credits Return which provides some tools, but more importantly they should be also aware of the T1213 - Request to Reduce Tax Deductions at Source.

The key point that seems to be missed in the mainstream media is getting a tax refund means you have overpaid during the past year and have given the government an interest-free loan. Yes interest rates are low and the returns palty, but I'd rather have control of the funds and earn even just a tiny amount of interest rather than providing an interest free loan. Heck, look at the High interest rates for savings, GICs and MMFs (2017) topic is see the chase to earn that extra return.

During my working years, I regularly filed at T1213 based on RRSP contributions early in the year to gain the source deduction and therefore reducing my annual tax balance owing or refund to a small balance owing due to investment returns that were not subject to source deductions.

As I stated in the original post,
Peculiar_Investor wrote: 28 Apr 2017 10:38 If/when I get a tax refund, what I do is walk back through our tax returns and determine what caused the overpayment of tax obligations at source that contributed to the unwanted refund.
You'll find lots of advice on what to do with your refund, but I'm suggesting that through better planning you can manage your tax affairs so your don't create the situation that results in a refund. Essentially you'll be getting your "refund" during the year by withholding the appropriate amount of tax and keeping the money in your hands rather than loaning it to the government for a year.

Planning and expecting a refund each year isn't efficient use of your funds, although the government does appreciate the loan.
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Re: I don't want a refund, the goal should be having taxes owing

Post by longinvest »

Peculiar_Investor,

I'll disagree. This year, I've been loaning the federal and provincial governments a total of less than $1,000 (combined). How much would have I earned on $1,000, before tax, in a Tangerine* account? $8. (Actually, it's more like $6 before tax, because the $1,000 accrues slowly over the 12 months, but there's also the 5 months delay after the end of the year to get the money back).

* One could make a bit more at the likes of Oaken, of course.

In the grand scheme of things, there are far more enjoyable uses for my time. I'd rather use it to read and post to this forum, instead of filling forms and completing the entire process to get less deducted from my paycheck. :wink:
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Re: I don't want a refund, the goal should be having taxes owing

Post by AltaRed »

It's a personality trait, often exhibited by engineers and accountants, to get the very most out of the system, even if the equivalent hourly rate to capture those few dollars is less than minimum wage. :P

I've done my very best over the last several years to re-train myself into saying 'fud it'. :lol:
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Re: I don't want a refund, the goal should be having taxes owing

Post by Shakespeare »

You're ideal balance should be zero, since you don't want to pay penalties, either. Which you might if you mess up your installments...
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Re: I don't want a refund, the goal should be having taxes owing

Post by Peculiar_Investor »

I'm not suggesting that taxpayers try to find the last dollar of savings. I'm suggesting a more general mindset change.

If you are habitually getting a tax refund then there may be an opportunity to make changes because a prudent taxpayer should desire to have a small balance owing when tax filing. From my perspective, getting an annual refund means that your tax planning can be improved and you should be reviewing your tax return to find what is the cause of the habitual refund.
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Re: I don't want a refund, the goal should be having taxes owing

Post by longinvest »

From a cash-flow management perspective, it's just easier to get a refund. (No need to look for cash to pay the Canadian Revenue Agency and Revenu Québec.)

From a risk management perspective, getting a refund comes with a lower probability of screwing up the form filling and having to pay penalties.

I don't know if it's like installments (e.g. penalties for not predicting correctly), but it's really difficult to anticipate all future taxable events in a tax year, because taxable portfolio distributions and capital gains due to rebalancing are hard to predict in advance.

I'm a fan of simplicity and good enough. Others strive for perfection. I've given up on perfection; I find it too elusive. As soon as I think something is perfect, I discover a new flaw.
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Re: I don't want a refund, the goal should be having taxes owing

Post by kcowan »

I am in SQRTs camp. Capital gains are lumpy. So after a year a "profit-taking" I end up paying too much in instalments. But I always pay what they ask. Before that, when working, bonuses made earnings lumpy. PI could say that I should make a proper forecast of earnings and just pay that amount of tax. I have tried that and failed miserably. So the interest paid seems cheap compared to the penalties.

As for the man on the street, I don't think what you are talking about requires more sophistication not commonly held.

This year we get $1800 back!
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Re: I don't want a refund, the goal should be having taxes owing

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kcowan wrote: 30 Apr 2017 13:13 This year we get $1800 back!
^^^
There's the emotional aspect, too! Who doesn't like to get money from the government?

I can say, for sure, that my wife much prefers getting a refund than having to pay money with her tax return. Of course, I could try to explain to her that she lost a few dollars in pre-tax interest and she should be happy to pay the government, but I won't convince her. This only works with engineers and the likes.
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Re: I don't want a refund, the goal should be having taxes owing

Post by Peculiar_Investor »

longinvest wrote: 30 Apr 2017 13:03 From a cash-flow management perspective, it's just easier to get a refund.
That's the mindset problem. It appears that when it comes to CRA we've been trained to overpay. Refunds = overpayment of taxes, plain and simple. Do people routinely overpay all their utility bills etc. Of course not, so why overpay CRA?
longinvest wrote: 30 Apr 2017 13:03 I'm a fan of simplicity and good enough. Others strive for perfection. I've given up on perfection; I find it too elusive.
I'm not advocating for perfection, just a good plan.
Peculiar_Investor wrote: 28 Apr 2017 10:38 So I'm reading through What to do once you’ve received your tax refund: Pape | Toronto Star. I'm amazed that nowhere in the article does Pape mention that getting a refund means that you've been giving the government an interest free loan for the past year because you've overpaid your tax obligations at source.
Pape, and many others, are happy to explain what to do with a refund, but nobody that I've read explains how to reduce/eliminate this overpayment. It doesn't need to be difficult, once a year look over your TD1 and possibly file a T1213 so you are only having deducted what should be deducted.
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Re: I don't want a refund, the goal should be having taxes owing

Post by longinvest »

Peculiar_Investor,
Peculiar_Investor wrote: 30 Apr 2017 13:24
longinvest wrote: 30 Apr 2017 13:03 From a cash-flow management perspective, it's just easier to get a refund.
That's the mindset problem.
You're perfectly right; it is a behavioral mistake. But, it's a tiny one with no significant impact. Getting a lower weighted MER in one's portfolio will have a much bigger impact on wealth accumulation.
Peculiar_Investor wrote: 30 Apr 2017 13:24It doesn't need to be difficult, once a year look over your TD1 and possibly file a T1213 so you are only having deducted what should be deducted.
Are there penalties for getting unanticipated income (such as taxable portfolio distributions), or for not putting as much as anticipated in one's RRSP (due to job loss, or whatever)? If yes, one would have to consider the risk aspect of filling T1213 (CRA) and TP-1016 (RQ) before doing so.
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Re: I don't want a refund, the goal should be having taxes owing

Post by ghariton »

I'm in SQRT's situation. I have lots of difficulty predicting my income for each year, in my case because I'm self-employed and don't know what work is coming and, especially, the timing of it. I used to adjust for that by "catching up" on my September installment payment if necessary, paying September and December in one shot and hoping that the overall result would be acceptable to CRA. For many years it was, and they charged me no interest. But in latter years my work has been even more back-loaded than before and paying the last installment early is no longer enough. So I just pay the amounts CRA tells me.

I have lots of sympathy for P_I's position, especially for those whose income streams are predictable. In my view, the financial press does a poor educational job. Many of the articles are of the "what should I buy now" variety, leaving many topics without coverage. But I suspect that's what the lay public wants to hear -- unfortunately -- and so that's what is served up to them.

Finally, I do understand people who find it much more pleasant to get a tax refund. For those with deductions at source, the "pain" is minimal, and probably not even noticed, as many people focus solely on their take-home pay. Another way of thinking about this, I guess, is as a forced saving scheme (albeit at zero interest). Reminds me of the Christmas Club savings accounts banks used to offer when I was young: Put aside so much a week and get money at Christmas to purchase gifts and such. All at zero interest too.

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Re: I don't want a refund, the goal should be having taxes owing

Post by longinvest »

From a behavioral point of view, the CRA got it right. By making sure most people with a regular salary get some money back:
  • it increases compliance, as people have an incentive to submit their tax return (they have to, to get a refund), and
  • the CRA can make some interest on the money, lowering the need to collect more taxes.
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Re: I don't want a refund, the goal should be having taxes owing

Post by Jo Anne »

And then there's the situation where CRA, for whatever reason, messes up your assessment and denies your refund. I don't know if it happens to much nowadays, what with electronic filing and all, but about 25 years ago they transposed a couple of numbers on my husband's return and a $2000 refund became a small amount owing for us. I was right and they were wrong, but it took until November to get it straightened out. Since then, I have always tried to owe them money.
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Re: I don't want a refund, the goal should be having taxes owing

Post by Peculiar_Investor »

Did FWF spawn an idea for an article? How to stop paying the Tax Man too much: Vaz-Oxlade | Toronto Star
Gail Vaz-Oxlade wrote:Reality check: Money in your pocket now is better than money in your pocket down the road.

And yet every year about two-thirds of the people who file a tax return in Canada end up getting a refund, with the average refund running to just over $1,400.

Geeze Louise! That’s more than $100 a month you could have put to work for YOU.

<snip>

Here’s a form that very few people use, but is remarkably useful for keeping money out of the government’s hands: Form T1213: Request to Reduce Tax Deductions at Source. This form lets you request permission from the Tax Man to have your employer reduce the amount of income tax taken off of your paycheque every month.

If you can demonstrate that you’re eligible for certain recurring deductions that will reduce your tax bill at the end of the year, you can trade in your tax refund for more take-home pay.
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Re: I don't want a refund, the goal should be having taxes owing

Post by kcowan »

When I was working, I would submit the T1213 for bonus = 0, then pay quarterlies to cover bonus = 100% and hope that my outperformance tax owing was less than $3000 added tax owing. When I exceeded that, I could afford to pay the penalty! It only happened a couple of times. So I agree with PI in principle for anyone with predictable outcomes.

Now I agree with SQRT.
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Re: I don't want a refund, the goal should be having taxes owing

Post by Norbert Schlenker »

Let me describe another situation which, while relatively rare, justifies paying too much too soon. "Money burning a hole in one's pocket" may not be common for an FWF member, but it's not uncommon among the general populace. If it's in hand or in the bank, then why not consider spending it, whether that be necessaries or pure fun? Do you wanna be you or Vegas you?

Now put a taxable windfall in the hands of such a person mid-year. A fairly common instance would be "I just need a little to tide me over til next month, so why don't I pull $4000 out of my RRSP." (10% tax gets withheld, which for most people won't come close to covering the actual tax due next April.) Less common, but something I saw very recently, would be selling property on which capital gains taxes will be levied. (Sell a bare lot, or a classic car, or a drawerful of unused jewellery. Set nothing aside from the gross proceeds.)

Now the average INTJ engineer would argue that this person should (a) calculate the eventual damage that will be due in ten months time and (b) tuck it away in a safe place until then, but that presumes both facility with arithmetic and willpower. Lacking either one is likely to lead to stress, embarrassment, and perhaps penalties and interest. Such a person is better off paying, even overpaying, well ahead of the tax filing deadline. If you've got $30,000 in hand from selling the '66 Mustang on Canada Day, consider sending $7000 to Ottawa tomorrow even if it turns out only $4000 will be owed. If you don't send the $7000 today, Vegas you will spend it and will have no way to find the $4000 on April 30 next. (Except for that always tempting RRSP. ;) )
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