With the tax season upon us and holiday bills coming in, it is also time for a little reminder about checking your Canadian Credit Report for Free. Ideally Canadians should check their credit score and credit history at least once a year. Personally I like to be informed on changes to my credit rating and have signed up for one of the credit alert services offered by the bureau. This offers up to the date scores and status on credit report.
With a couple of months remaining until the tax deadline, I thought it might help to bring up a topic that doesn’t get much discussion – Purposely paying more taxes to get a bigger refund at the end of the year. Having been in the financial industry for many years, I know for a fact that the majority of Canadians look forward to a tax refund. Aside from the usual planning to optimize taxes, some of them are requesting for more taxes to be taken from paycheques. What!??!
When you started your job, you may remember that you had to fill out a TD1 form. This form basically helps your employer calculate how much tax they will withhold from your regular pay. This is useful in cases where you have more than one source of income or regular recurring deductions like childcare. A TD1 form will determine if more or less taxes will be taken from your pay.
For those that can never seem to get ahead or have a tendency to dip into their savings, requesting for more tax can be a viable option. Paying more taxes throughout the year will result in a larger tax refund at the end of the year. This refund then is like a forced savings which can then be used to clear credit card bills, reduce debt and ultimately improve credit scores. Does this strategy work? Yes. Is it ideal? No.
Essentially, paying more taxes is something that nobody wants to do. The best case scenario is to have a tax refund balance of zero. Meaning you have paid just enough taxes to satisfy the taxman. A larger refund really means that you are giving more money than you should have to the government. Ideally, when it comes to savings, you are better off taking as much pay home as you can and putting it into some kind of investment where you can earn interest: tax free savings account, high interest savings account, mutual funds etc.
If you have a hard time holding on to your money, I suggest looking into updating your TD1 form for 2014. If you pay an extra $100 bi-weekly in taxes, at the end of the year, you will have an extra $2600 in tax refunds. Imagine the impact on your credit scores from using the refund to reduce your debt…
Again, I stress, this is not for everyone. Why would you give the government an interest free loan? Right? But in some cases, big refunds work and it’s like getting a lump sum of unexpected cash. What do you think? Should Canadians purposely pay more taxes to get bigger refunds?