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Why Tax Refunds are a Bad Thing (and How You Can Avoid Them)

Why Tax Refunds are a Bad Thing (and How You Can Avoid Them)

There are many jokes about how terrible tax time is, but the truth is that many people actually enjoy tax time. While the paperwork is never a good time, the result of filing your taxes can mean that you end up with a nice, big refund.

However, getting a big refund isn’t always the best way to go about things. The truth is this: while many people get excited about large tax refunds, all it really means is that you lent the government money throughout the year, interest-free.

Use Your Money for You, All Year Long

Many people think of a tax refund as a windfall. It feels as though you are getting “new” money. However, there’s a reason that it’s called a refund. Basically, the government owes you money because you have overpaid in taxes.

When you have a tax refund coming, especially a big one, it means that you have been sending money to the government, for the government to use without paying you interest. Rather than letting the government use that money, you could be putting it to work on your own behalf. You could be using that money all year to improve your financial situation. You could be earning interest on that money.

Say you are paid bi-weekly and every year you expect a tax refund of $5,200. Maybe this is due to set RRSP contributions, plus a stay at home spouse and a couple of children. While it is nice to get all this money at once and make a lump sum mortgage payment, pay down consumer debt or put it in savings and investments, you lose out a bit by not having that extra $200 every two weeks. Yes, you get it back in the end, but there are other things you could be doing with the money throughout the year, to see a much better result.

With mortgages or other debt, paying an extra $200 every two weeks will reduce your principal sooner so you pay less interest overall. Not only can you pay less in interest, but you will pay off your mortgage faster. It’s a good way to truly become debt free, and do it faster than you would with a single payment once a year.

You don’t have to use your money to pay down a mortgage, though. You can also benefit with the help of savings. Instead of using the lump sum, and put money in every two weeks to give it extra time for the interest to grow. The extra interest can give you a boost since the compound interest will increase your bank account faster than if you wait to receive a tax refund.

You can do even better over time if you invest that money every two weeks, instead of at refund time. You’ll get the benefits of dollar cost averaging, catching both the highs and lows to reduce your risk.

Adjusting Your Tax Withholding

If you want to change things up, and make sure that you are growing your wealth faster, you need to change your tax withholding. Once you get your withholding adjusted, you can keep more money in your pay cheque, and use it to improve your finances.

The first form you can complete is the TD1. Filing this form with your employer will allow them to adjust the amount of tax they deduct from your income for the following items:

  • Child amount
  • Age amount
  • Pension income amount
  • Tuition, education and textbook amounts
  • Disability amount
  • Spouse or common-law partner amount
  • Amount for an eligible dependant
  • Caregiver amount
  • Amount for infirm dependants age 18 or older
  • Amounts transferred from your spouse or common-law partner
  • Amounts transferred from a dependant

The second form that can help is the T1213. This form needs to be submitted to the Client Services Division of your tax services office. They will then send you a letter of authority to give to your employer. This will instruct your employer to deduct less tax from your income due to the following deductions or tax credits:

  • RRSP contributions
  • Child care expenses
  • Support payments
  • Employment expenses
  • Carrying charges and interest expenses on investment loans
  • Charitable donations
  • Political contributions

While it does take a little extra effort to change your withholding, it’s worth it. Long term, it means that you have better opportunities to boost your wealth over time.


  1. Ray

    thanks for the forms, I was not aware you could reduce your tax payment at source other than through group RRSP deductions.

  2. Tom Drake

    Ray, I think the T1213 could benefit quite a few people through the RRSP contributions alone. You could actually increase a bi-weekly contribution by the increased amount on your paycheque. You wouldn’t even notice the difference as long as you’re not depending on the yearly refund for anything.

  3. Dayne

    I always owe tax’s it usually a small amount 500-600 each year, but I would prefer to have my employer pay the right amount, how do I determine what amount I should be paying and what form do I use to change this?

  4. Shahrukh Bakar

    Can the T1213 be used to request a reduction in income tax deduction at source due to carryforward tuition, education and textbook amounts?

  5. Money Beagle

    On paper, your statement of tax refunds being ‘bad’ can indeed prove true. After all, you can invest or even put it in an interest bearing account and come out ahead, which proves your argument.

    What I’ve found, though, is that in practicality, this may not always work. The simple truth for many people is that if you have more money come in, which you would under normal circumstance once you adjusted your deductions, you’ll be tempted to spend it. Even if you spend just 2% of the difference, you could effectively undo the so-called ‘benefit’ of taking the money throughout the year.

  6. My Own Advisor

    Good post Tom.

    Totally agree: “The truth is this: while many people get excited about large tax refunds, all it really means is that you lent the government money throughout the year, interest free.”

    I wish more people understood this!


    • Troy Bombardia

      In the meantime you could have been using that money to grow your business, pay down your mortgage, etc.

  7. Dan

    I think tax refunds are only bad if they’re a result of low source deductions (amounts taken off each cheque). Finding additional credits, income splitting and transferring credits that create refunds are all great things 🙂

  8. John Brewer

    Hey Tom Really like your view on things.

    Both Canadian and US residents have a real advantage when it comes to the financial advantage of a early tax refund.

    I’ve always said that re-educated tax payers can use the lucrative small business tax advantages we’re entitled to while living in Canada/US and redirect this early tax refund you’ve spoken about to either finance your new internet business or increase your annual retirement fund (RRSP/401k)

    If we think things trough we’re basically giving away our retirement especially when it’s definitely possible to legitimately recover the cash that we allow our governments to withhold on us each and every month.

    I think it’s time we seek out these legal tax deductions we’re entitled to and begin financing our plans for an early retirement 🙂

    have a great one!!!

  9. Larry

    I will be retiring in early 2017 and I would like to have my income tax source deduction reduced on my pension cheque and not wait the entire year for a big tax refund.

    My eligible Pension income for splitting will be over 65K a year and my wife makes no income, so the refund is sizable.

    You don’t have this listed under T1213. Will CRA allow this ?

  10. Penny deSaver

    Totally agree. We have our taxes set up so that we end up owing a little every year. I like it that way. It irks me to no end to think that the government is holding my money beyond what I would owe in taxes throughout the year, earning interest on it, and then returning it to me (without the earned interest) like it’s some sort of gift.

  11. Matt

    Good post. It’s all about the time value of money and not giving the gov’t a free loan is a great point. Also I suggest to fill your TFSA first before your RRSP for the year, as you won’t get the refund any sooner.

  12. Nancy Louise Byng

    I saw this on tv years ago & totally agree with it, however, there are a lot of people that cannot condition themselves to saving that extra tax money, whether if be weekly, bi-weekly, etc.

  13. Guy

    Like the post. Like to keep a bit of surplus as do not want to get into installment payments as they could turn into a bit of a mess.

  14. Troy Bombardia

    That is very true. You could have been earnings interest or a return on the money you “lent” to the government. Great post.

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