A large refund from the CRA is not as exciting as it may seem when you receive the cheque; it is a sign of poor tax planning. People earning a salary have tax withheld from their pay throughout the year, and if the amount of tax withheld ends up being greater than the actual tax owed at the time of filing, a refund from CRA is the result. How can this be a bad thing if you’re getting the money back in your pocket when you file your return? Consider that when you get a big tax refund, the amount refunded to you has been doing nothing throughout the year. These dollars have not been earning interest, capital gains, or dividends, and they have not been paying down debts that you may have.

Another way to think about this is that by paying too much tax throughout the year, you are locking your money up in an investment with a guaranteed 0% return. CRA is accepting your excess tax payments, holding them until the end of the year, and then returning them to you. A big refund may seem like a nice surprise, but all surprises are your enemy in personal finance.

Perfect tax planning would yield a $0 refund, and greater cash flow throughout the year; a $0 refund is unlikely to be achieved, but it is the goal.

Reduced withholding tax can be accomplished by sending the CRA form TD1213, requesting that they give your employer permission to reduce the amount of tax being withheld at source to more closely reflect your planned tax situation. One of the most notable and predictable deductions is your RRSP contributions. If you are able to show CRA that you are making regular RRSP contributions, they will allow your employer to reduce your withholding tax to reflect your reduced taxable income. This means no more big refunds after that last minute RRSP contribution, but it also means those refund dollars can be put to work each paycheque. An implication of this planning is that it requires… planning. No more last minute lump sum RRSP contributions on the day of the deadline. Similar planning can be applied for child care expenses, support payments, employment expenses, charitable donations, and a handful of others.

A dollar today is always worth more than a dollar tomorrow, but it is the disciplined use of these dollars that will ultimately benefit long-term wealth.