Pay Taxes or Your RRSP ?

Given my love for the RRSP (or the Tax Deferral Savings Plan), I was wondering whether folks use it to defer owed taxes? The simple question is Pay Taxes or Your RRSP ?

If you received my T4 early enough that you could estimate my taxes, what would you do if you estimated you owed $500 taxes?

You have two options:

  1. Give the CRA their $500 and forget about it
  2. Put enough money into your RRSP (before March 1st) to counteract the owed taxes. This means you would then owe $0 in taxes.

The argument I keep hearing is that if I put money away in an RRSP now, I’ll just end up paying a higher tax rate on it when I take the money out. There is a school of thought that you might be in a higher tax bracket when you retire. To me, it seems an odd statement given the money will grow (hopefully) in your RRSP. This mean you’ll have more money to be taxed, albeit at a higher rate ?

I tried very hard to find what your nominal tax rate might be in Ontario, but let’s just assume it’s 50% for you.

This means you need to put about $750 into your RRSP to not pay $500 in taxes to the CRA. To do this exercise, if you have Quicktax or something similar, you can simply plug numbers into their RRSP estimator. This might be a better way to estimate, how much to pay.

Now you have $750 in your RRSP, and say you are 32. You have about 30 years until you want to take your $750 out. Assuming a simple growth 4.5% year over year, it will be about $3100.

Why not Put It in an RRSP ?

You now take $3100 out at a higher tax rate (say 60% again hopefully taxes in 32 years are not that brutally high), but it is still about $1300 dollars net. The bonus is you didn’t have to pay the CRA $500 32 years ago (an added bonus).

A net investment of $250 (you were going to have to spend $500 no matter what) you end up with $800 ? Seems like a winner to me.

Why wouldn’t you do this? If you didn’t have $750 dollars I suppose that might stop you, but are there other reasons?

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Tax Time: When the T-4 Arrives

For me, tax season begins when I get the Tax software (this year I started fiddling around about 2 weeks ago, using some estimates). It really starts (however) when I get my T4 form.

For folks like me who are working stiffs the T4 is the tax form that describes your income and taxes paid, etc.. Your employer must prepare this for you to pay for the previous tax year. Once I get this form, my Tax preparation becomes much more concrete and tangible, because this form gives me the real numbers that cover 85% of my tax information (effectively).

What Other Forms Do You Need?

The real danger I have is once I have my T4  I start getting giddy and want to send my return in, without trying to remember the important forms that may not have shown up yet, such as:

Tax season

T4 From the CRA Web Site

  • Any and all of my charitable contributions, which do tend to take a while to show up (I usually check out my Quicken log to get an estimate of those).
  • Receipts for tuition that I might have paid for my daughter’s university (yes, some schools do take their sweet time to get those receipts out).
  • My wife’s tax forms from the Government, for the UCCB, this year it doesn’t matter since we didn’t receive it, but I almost forgot that income one year. (no longer applicable).

There are many other things that I must patiently wait for, and as a final double-check, I go over my previous year’s tax form (which I print as a PDF when I e-filed), making sure I didn’t forget anything from the previous year. This doesn’t catch any new income that I may have forgotten about, but it has stopped me from making many big boo-boos over the  years.

This year’s major gaff (so far), is that I forgot to include my Pension Plan payments in my estimated values.

I don’t do any RRSP day-dreaming these days, but I do try out Turbo Tax’s RRSP estimator for fun (I don’t have money lying around to put in RRSPs, but it is still fun to try it out).

Is it Tax Season for you yet?

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Dang: Almost Forgot Safe Deposit Box

Remember that your safe deposit box is no longer a valid carrying fee.

Yup, whilst doing the Great American Novel also known as my tax returns for my Family I went over last year’s returns to see what I had forgotten and sure enough from Line 221 leading to Schedule 4 in my return, I had forgotten to declare my Safety Deposit Box (again). I do this every year but this is why it is important to review your previous returns to see if you are forgetting things.

This may not seem that important but each of these small things really do add up in terms of money back from your taxes. What other things have I almost forgotten over the years?

  • Active child tax credits (and this year, if you are an Ontario resident, you get some there too).
  • Charitable donations, in general. Many of these get forgotten and if there isn’t a receipt (or you were given the receipt last April, and you forgot to file it), you can lose out on some easy refund money.
  • Moving Expenses, if you are a new grad and you moved to somewhere new to get a job, that is part of your taxes, and you should look into this. I forgot this on my first taxes (but back then we did it with pencils and forms, so I can be forgiven).
  • Rental costs if you are a student (or if you rent), remember that could add up depending on how much your income might be.
  • Actually filing your return!

Yup, I know more than a few folks, who have not filed their tax returns for the past few years. I am astounded that these folks haven’t, since they most likely are owed money by the government.

Don’t forget some of these easy credits or deductions and for gods sake, please file a return!

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Medical Expenses and Taxes

Remember that if you have enough Medical Expenses it might be worth mentioning them on your Federal Tax returns.

Last year was a bigger year for medical expenses for me because of the following:

  • One of my daughters ruptured her ACL, and there was a fair amount of expenses there, including a brace and physio therapy.
  • I needed physio therapy for my knee, due to me getting old
  • My other daughter also had physio
  • Some visits to Psychologist for testing for my kids
  • Occupational Therapy for another kid

Now a great deal of this was covered under my health plan, but only up to 80% of the expense, and there was a limit to how much was paid for the year.

All of this adds up to over $7000 in expenses, but I must also then put in how much compensation I received from my Health insurance as well. It may add up to nothing, but it is something to think about.

How  was I able to know this? I checked on my Quicken, of course (sorry for the blatant plug, but it is actually the case in this instance). I put it all into my TurboTax and it was easy enough to put it all in too (another blatant plug, but stay tuned there will be a giveaway coming too).

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QuickTax Software Give-away Time

It is time for the first major give-away on this site (ever).

Intuit was kind enough to contact me and send me 2 copies of  QuickTax Standard, which I will gladly give away (since I already bought a copy for myself before they sent me these (yes, irony is a good friend of mine)).

Legalities: Please note, I do use Quicktax (and Quicken) but the copies I have I paid for with my own money (more fool me), I think these are useful tools, but I am not being directly paid to run this give-away (in fact I am out of pocket because I have to ship it to you).  I do run advertising for Intuit to sell Quicktax, as you have seen over the past few weeks, but this give-away is not connected to those ads.

How can you win one of these free copies? Well, let’s first start out with some of the ground rules:

Free Software

Ground Rules

  1. I assume  you are a regular reader of this blog, so all you need to do is leave a comment on this post with your e-mail address to enter (no mailing address needed yet, just an e-mail).
  2. Given this software is for Canadian Taxes, you should really be a Canadian, or have a use for it (don’t just enter so that you can re-sell it on E-bay that is just scummy).
  3. Your comment needs to have a good reason why you want this software (if you say you are having problems with the CRA and are thinking about going for a short airplane trip, you are disqualified), yes, I want it is a valid reason, but so dull. Also remember I have ANTI-SPAM filters on my comments, so if your comment looks like SPAM it might not get entered (or if you are a SPAMMER!).
  4. If you subscribe to my feed, you will have my undying respect and your Karmic mojo will increase 3 fold (no, you don’t get another entry, but I figured I’d beg).
  5. Feel free to TWEET this (remember I am on twitter as the BigCajunMan (see the button below), and if I see you tweet this, I will add another entry in for you).
  6. I hope shipping this isn’t too expensive (no it is not going to go Fed Ex or overnight, it will go via Canada Post).
  7. If you are associated with Intuit or are married/related to me, you are not eligible to enter.

Follow bigcajunman on Twitter

Contest will close on Tuesday February 23rd at Midnight.

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