I hope you are not waiting for an RRSP refund

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NOTE: This is a guest post by Ross Taylor.

It never ceases to amaze me how many people gush about their expected income tax refunds; especially those generated by their RRSP contributions. What are they waiting for? Why did they decide it was a good idea to make an interest free loan to the feds over the past year? Why not have that refund coming to you every month you make a contribution, instead of waiting till late spring of the following year?

Back in the eighties, $7,500 was the maximum allowable annual contribution, and even then, it was still important for my clients to have their refund in their hands, rather than in the feds’ pockets. In 2012, the maximum RRSP contribution is $22,970 – that’s serious coin! If your marginal tax rate is say 40%, your contribution is going to generate a refund over $9,000.

If your take home pay is subject to deductions at source, all you have to do is talk to whoever manages payroll for your employer and explain your intentions for the tax year. You can do this at any time, not just during the so called “RRSP Season.” The net result will be your monthly payment will only incur an out of pocket cost of around 60% of the actual amount.

The conversation goes something like this:

You: So I plan to contribute $600 each month to my RRSP, and I want my withholding taxes at source adjusted with each pay check.

Payroll: No problem, let’s fill out this form T1213, and then send it in to CRA, and within a month or two you will see an increase in your take home pay.

You: It’s that easy?

Payroll: Yep. As a matter of fact, you can make the adjustment not just for your RRSP contributions. You can even include child care costs, certain support orders, charitable donations, and carrying charges and interest expenses on investment loans.

Payroll: Before you file the request to reduce source deductions you’ll need to provide proof that you have set up a pre-authorized contribution plan for your RRSP, and my contact info as your employer’s payroll administrator.

It sounds simple because it is. It’s not for everyone though. Some see their expected tax refund as a forced savings plan – they worry they won’t have the discipline to save that much if left to their own devices.

Doing it the old fashioned way, they know they will receive a lump sum of several thousand dollars which they can then use as they see fit – make a TFSA contribution or a lump sum mortgage payment, put it towards a home reno project or maybe even a dream vacation.

Others plan to pay down unsecured debt with their refund – but this means they carried debt at anywhere from 6% to 29.9% interest, while they loaned out their money at 0%.

Back in 1988, a very smart marketing visionary named John Ritchie (who was the coach of the Crazy Canucks ski team during their glory days) loved the Form T1213 so much he decided to give it a name, and he developed an entire financial product strategy around it.

He called it ProAct. And he dubbed it “the greatest innovation since the pay check”

In those days, even humble GIC’s were paying yields of around ten percent, and the highest marginal tax rates were closer to 50%. So the opportunity cost of NOT receiving your tax refund each month was rather high.

It was a brilliant stroke, and John poured a ton of energy into making a product out of a simple administrative process. Alas the financial institution he toiled for was not prepared to back the idea sufficiently to give legs to the product launch, and as a result, ProAct quietly disappeared in a few years.