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Friday, March 27, 2015

Dreading Taxes

Posted by Tim Stobbs on March 16, 2015

You look at the form and turn away, but then look again anyway.  Your mind screams for you to stop this madness but your press on away just to finish up this section of the form.  Then it is over for today, you rest and regain your strength to face the beast that is your taxes.

The above paragraph is a bit exaggerated but not by much for some people.  Dreading your taxes is a fairly common event, but what various is the amount of procrastination that goes with it. I should know as I am a bit of expert of avoiding doing my taxes.

I’ll clean the house, fix something, play with the kids, read a book, cook something all to avoid doing my taxes for a few more minutes.  Yet the reality of the situation is my taxes are actually not that difficult anymore.

In the beginning taxes were drop dead easy.  Input T4, add in a few deductions and file it.  Done.  Then we started adding things over the years like kids and all those possible deductions, a home based business and all those fund calculations and eventually taxable investments with all that tracking that goes along with that.  Eventually my taxes expanded from 30 minutes to several hours and finally half a day to prepare.

So for number of years my taxes got progressively more difficult to do by myself, but in the last few years they have turned into something that is fairly stable.  So now I don’t have to learn an entire new section each year, but rather just spend my time double checking everything rather than spending hours on CRA’s website reading tax bulletins trying to understand some detail of if a deduction applies to us.

This stability has allowed my wife and I to do some minor adjustments to our organization to make things a bit easier such as:

  • We track all our house bills (water, heat, power) in a spreadsheet to allow easy roll up at year end when we calculate business use of the house.
  • My wife tracks her business accounting with a little program that allows her to assign tax categories during the course of the year.  So come tax time she prints out a report with the totals for me to review.
  • I created a file folder each year and put any tax related slips I may need in it starting with the notice of assessment from the previous tax year.  That way I don’t have to look around for the various paperwork when I start entering in information.

Each of those are fairly minor items, but they all help to make filing our taxes a bit easier at the end.  I’ve come to realize that I actually don’t dread my taxes…I dread all the organization that I have to do to get ready to file them.  So by spending a bit of time during the year to make things easier eventually pays off to make filing our taxes just a bit easier.  It isn’t perfect by any measure, but I’ve managed to shift a dreaded task into something tolerable.

So do you dread preparing your taxes?  Have you found any tricks to make it easier on yourself (other than the obvious of paying someone else to do it)?

How Not To Spend Your Tax Refund

Posted by Tim Stobbs on April 24, 2014

*click* “Oh wow, that’s my account balance?!? I’m pushing almost $10K. I must have got my tax refund.”  That was me a few days ago on the computer.

I really do like that feeling of getting my money back from the government.  There is something nice about getting a bit of extra cash that you previously weren’t planning on.  In my case, I normally owe a small amount of tax each year so getting a refund over $4000 was unusual. Yet I had managed to put a lot of money in a spousal RRSP and thus got a extra big refund because of it.

So for about a few seconds I ideally wondered what I could spend the money on.  A nicer summer vacation could be fun or perhaps a break from winter later this year.  Or perhaps I could start that kitchen renovation that we keep talking about?  Yet in the end I did what I had already planned.  I moved every dime of the refund I got (plus a little extra) over to my TFSA and maxed out my contribution this year.

How did I managed to do that?  It’s called planning ahead.

The day I filed our taxes I knew I had a bit of time until my refund was put in, so I started thinking about what to do about that money then…before I ever had it.  That way I could go through every idea in my head and sleep on it before making a decision.

So yes I did consider spending my tax refund on other things like a vacation or kitchen reno, but ultimately I just loved the irony of using a tax refund to invest without paying any more tax on that money.  I can’t say everyone should do that since if you have lots of debt you might want to pay that off first.

In the end the only really bad way to spend your tax refund…is on an impulse buy.  After all what might seem like a good idea at the time could end up being a waste of money.  I think everyone has gone through buyer’s remorse at some time or another.  So right after you submit your taxes sit down and start dreaming.  Then after a few days of sleeping on the idea you will really know if it is a good one or not.

What did you do with your tax refund this year?  Or what do you plan to do?


Maxed Out

Posted by Tim Stobbs on April 9, 2014

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?