You don’t have to wait until spring to get a tax refund. There are two ways to reduce the amount of tax you pay throughout the year: Joining a group RRSP or reducing taxes at source by sending a form to the Canada Revenue Agency (CRA).
Group RRSPs are offered by a number of employers across Canada. And there are many advantages of joining a group RRSP.
First, your savings are automatic. This allows you to make a contribution to your retirement savings every time you get paid, which means you also don’t have to worry about making a last-minute contribution every year.
Second, your employer will often match your contribution. For instance, some generous employers will give you a 100% match up to a certain amount while others may provide a match of 25% to 50%. That’s free money just for joining the plan. Rarely will you ever be able to find an investment where you can get such a great return on your money overnight.
Third, you benefit from lower fees. The funds offered by the group RRSP have lower management fees than the investment options offered by your financial institution. For example, the mutual fund you get at your bank may charge a management fee of about 2% annually. In a group RRSP, the fee may be half that amount because all of the employees’ RRSPs are pooled.
Finally, the biggest benefit is the instant tax savings. Contributions are made on a pre-tax basis so the amount of tax your employer deducts is calculated after your group RRSP contribution is subtracted.
Let’s assume your marginal tax rate is 40%. If you make a $250 contribution during every pay period, your net pay will only be reduced by $150. That leaves you with an extra $100 in your pocket each time you get paid. If you get paid twice a month, that equals $2,400 every year.
You will still get a tax refund of $2,400 if you make an RRSP contribution of $250 twice a month or $6,000 a year. However, you’ll have to wait until after you file your tax return to receive the refund.
If you don’t happen to have a group RRSP, there’s another way to get an instant tax refund. You need to complete and file Form T1213, which is called the Request to Reduce Tax Deductions at Source, with the CRA.
You need to provide supporting documents, such as proof of automatic contributions to your RRSP, in order to get the tax reduction when you send the form. Keep in mind it can take four to six weeks for the form to be processed.
In order to be eligible for this deduction, you must have filed all of your income tax returns and paid any amounts owing to the CRA. The one small downside is that you have to file Form T1213 every year.
Once the CRA approves your application, you realize the tax benefits immediately and you receive a larger paycheque.
The bottom line
Contributing to a group RRSP or reducing your taxes at source allows you to get your tax refund each time you get paid instead of waiting a week or two until after you file your tax return. If you invest the extra money you receive, you’ll end up with a lot more in the future.
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