Spring is in the air, and so is the hurried busyness of tax season. If you’re anything like me, then you probably have a few piles of papers, a bunch of receipts, and perhaps even a few T4s kicking around.
While claiming the right CRA tax deductions and tax credits can net you a tidy return, there are other means to lessen your tax burden this year. The trick is to know where to invest, how to invest, and what to do with your tax refund.
So to help you feel a little less taxed this time of year, here are my top tax tips to untax you during the dreaded tax season.
1. Become a Manic Maxer
A manic maxer is a term I invented to describe the investors who contribute to their retirement savings plans, such as an RRSP, at the beginning of the tax year in January. Maximizing your contribution earlier in the year, rather than later, has huge tax and retirement advantages, including:
- Earning an additional year of investment growth
- Maximizing your compounding power
- Getting your tax return sooner
- Retiring early
So if you’ve got the cash, get manic by maximizing your RRSP contribution at the beginning of the tax year. It just makes good financial sense.
2. Say NO to Tax Refunds
I hate tax refunds. To me, a tax refund is a colossal failure. A tax refund means you gave the government an interest free loan for the whole year. How generous of you!
A few years ago, Carl and I were refunded a combined $8200 for a single tax year. As a couple, this is exactly $683.33 less bucks a month we had in our savings accounts, earning interest for us. After doing a bit of research I found an awesome way to stop overpaying my taxes and loaning my hard-earned money to the CRA for free. If you are Canadian, just fill out form T1213 – Request to Reduce Tax Deductions at Source to stop giving the government an interest free loan. I complete this form every darn year, and love my “less taxed self” for it.
3. Rethink your refund, don’t squander it!
If you do get a tax refund, stop squandering it on consumer stuff, and Just Say No to Crap!. I hate crap, and so should you. Instead of letting marketers part you with your after tax dollars, consider using it to pay down credit card debt or make an extra mortgage payment. If your debt is covered, consider investing your refund in a diversified portfolio of Exchange Traded Funds or Index Funds. Some popular indexing options for Canadians are ING Streetwise Funds or TD e-Series Funds. When investing in funds, be sure to watch your fees with this handy Portfolio MER Calculator.
4. Max out Your Retirement Plans
Do you contribute a small fraction of the maximum allowable amount to your RRSP retirement plan? Well, I’m happy you contribute something (yay!), but not putting in the maximum amount means you pay more tax! To stop getting maximum taxed, try contributing a few additional dollars to your RRSPs. Besides, the longer your money has to compound the better off you are.
- Want to see the power of compounding? Try the Millionaire Savings Calculator see how many years it will take you to become a millionaire!
5. Shop Around for Tax Software
Have you been using the same tired tax software every darn year? Perhaps it’s time to shop around and check out lower priced options. I’ve reviewed both Studio Tax and UFile. My preference is with Studio Tax, as the package is free to download and is NetFile certified.
BONUS: Use Your Tax Free Savings Account (TFSA)
If you’re 18 or older, you can open a TFSA at your favourite financial institution and save up to $5,000 in cash, stocks, or bonds every year tax-free. Yes, I just wrote tax-free! Adding just a few dollars to your TFSA can add up to lots of loonies over the years. Check out 5 Reasons To Love Your Tax Free Savings Account (TFSA) for all the contribution rules and benefits!
With these five tax tips, may the year be less taxing on you!
Your Two Cents: Got a favourite tax tip to share? What do you do with your tax refund?