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Raise your hand if you have shown more love towards the Canadian government than your significant other when you get your tax refunds. Go ahead. I am raising mine as I type this blog. I won’t tell your spouse.
We, Canadians hate to fill up our papers during tax time but the truth is we know filing our taxes can result in a big refund for us. I have seen people lining up in Toronto Public Libraries to file their tax and I can tell they are all very excited about getting their tax refunds. I know because I used to be on those lines too. But, I got news for you. Tax refunds are usually not a good thing. SURPRISE! Did I disappoint you? Curse me, and then thank me at the end of this post. Some of you are probably saying but Urgen, the government is giving me money and I like money. Well, I like money too.
If you get a big tax refund, it usually means the government borrowed money from you throughout the year. Here’s what most of you don’t know, the government borrowed money from you – interest free. They gave you an egg for it. Just take a minute to imagine the other way around and imagine your money growing due to the magic of compound interest. Albert Einstein defined compound interest (CI) as the “greatest mathematical discovery of all time”. For those who don’t know what compound interest is, let me explain. First, you are a loser. CI means earning a return not only on your original investment but also on the accumulated interest that you reinvest. Obviously, by starting early, you will be able to better take advantage of compound interest.
I have done this several times and I am sure you have done it as well. We are required to fill out a CRA form whenever we start a new job. You have seen this before but this is how the form looks. You fill out the form and many other forms you need to sign during orientation. Orientation days are busy and you want to make new friends. Some of you want to impress your new co-workers and talk only about yourself for 18 minutes long until your new co-workers start to get antsy. Some of you prefer not to speak at all. Please don’t be one of them. All these distractions and you don’t give much attention to your CRA form. But, you should. At the bottom of the form, there is a box where the CRA asks if you want additional tax to be deducted. In simple English, can your government borrow more of your money for FREE? You just need to put a number in the box and it’s done. Easy peasy. Then, right at the end of the form, the government will ask you if you want reductions in tax deductions. Now, this process is not easy peasy where you just need to put a number and it’s done. If you want to reduce your taxes, the first step is to fill out the T1213 form and submit it to your taxation office. It depends on the province you reside in. All the addresses for different provinces can be found at the bottom of the form. If you reside in Nunavut or in Ontario like I do, send your request to
London TSO
451 Talbot Street
London ON N6A 5E5
Fax: 306-652-3211
You have to wait for a letter from CRA, which can take about six to eight weeks. Then, you take the letter to your employer giving them the permission to reduce the amount of taxes from your pay cheque each period. All these might take much more effort than just writing a number in the box, but it is totally worth it. Think 20 years from today. 30 years. Think 2047. Instead of the government borrowing your money for free, you could invest the money to use and let compound interest help you to boost your wealth over time. Like I always say if you are in your 20’s, 30’s and early 40’s, investing in the stock market is the way to go instead of just holding cash or crappy GICs. The catch is you can’t touch your money for a couple of decades, be disciplined and let it grow. Think index funds. You can read my post about index funds here.
Side note: I want to be crystal clear that I don’t have any problem paying taxes. We pay taxes only if we make money. It’s simple as that. Also, it is our freaking civic duty. I was born and raised in Nepal. I vividly remember the microbus rides like it was yesterday. I remember the roads were so bad that most of the passengers in the bus would fly and bang their head in the ceiling of the bus. I don’t think there was a public library. Traffic lights were as seldom. Anyone who knows me well know that I like to hang out at Toronto Public Library very often and I have already borrowed hundreds of book from TPL for free. For all these reasons, it seems churlish for me to complain about paying taxes. Of course, the naysayers will be there, complain about taxes and take shots at my work. IDGAF.
I hope I have convinced you that getting a big tax refund is not necessarily a good thing. I can’t fathom the idea of lending money to the government completely interest free. What do you think?
Lastly, Tom Drake from canadianfinance blog and Robert R. Brown deserves a special shout out as I found out thorough their blogs and book why tax refunds are usually not a good thing. Thank you Rob and Tom.