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Thursday, December 16, 2010 |TIM CESTNICK

I should have studied psychology in university. It might have been helpful in understanding people - especially my wife. I will pay $50 for a $30 item that I really need, but she'll pay $30 for a $50 item she doesn't need, just because it's on sale. Where I have exactly seven items in the bathroom that belong to me (toothbrush, toothpaste, dental floss, razor, shaving cream, soap and deodorant), she has 289 items and I can't begin to explain what they're for. I don't understand her.

Likewise, there are taxpayers I don't understand either. The fact is, many taxpayers prefer getting tax refunds to owing a small balance each year. I don't understand them. Getting a large tax refund each year simply means you've remitted too much tax to the Canada Revenue Agency (CRA) throughout the year. You didn't have use of that money and CRA isn't returning it to you with interest. While I don't understand these taxpayers, a recent study may shed some light on the matter.

THE RESEARCH

A 2007 study conducted by Donna Bobek, Richard Hatfield and Kristen Wentzel, published in the Journal of the American Taxation Association, sought to understand why taxpayers make payments to the government that ultimately result in a tax refund later. Sure, this was a U.S. study, but the psychology applies equally in Canada.

Taxpayers participating in the study responded to hypothetical scenarios in which they remitted less to the government throughout the year, taking home more each month. Most participants understood that there was a cost to overpaying taxes throughout the year. But what emerged was interesting: Participants felt satisfied with receiving a refund when filing their tax returns but felt uncomfortable with the uncertainty around how much they might owe at year-end when less tax was remitted throughout the year.

In addition, participants who preferred a tax refund considered the opportunity-cost of higher tax remittances throughout the year to be low. Further, they gained satisfaction from making plans about how to use their expected refund, and experienced anxiety about owing money when filing their returns in April.

THE REALITY

Okay, time for a reality check. Set aside those good feelings about getting a tax refund. Recognize that money in your pocket today is better than money in your pocket tomorrow. Each year, about 26 million taxpayers file tax returns in Canada. About two-thirds receive tax refunds annually. The average tax refund is about $1,400. If only you remitted less to the CRA throughout the year, you'd have that money to work with earlier.

Consider some numbers: If you received a $1,400 tax refund each year for 25 years and invested that refund at 8 per cent (which may appear on the high side but is realistic over a 25-year time horizon), you'd have $102,348 at the end of that time.

Now, if instead you didn't receive a refund but paid $116.67 less in tax each month throughout each year ($1,400 for each year) and invested those dollars, you'd have $110,953 at the end of 25 years. It may not seem huge, but that's 8.4 per cent more in your pocket in this example just by filing some simple paperwork.

In the study mentioned above, participants tended to overstate the time cost of the paperwork required to reduce the amount of tax withheld throughout the year. In Canada, it's not difficult to apply for a reduction in the amount of tax that's withheld from your pay if you're an employee. All that's required is that you file Form T1213: Request To Reduce Tax Deductions at Source. And now is the time to file this request for 2011 if you have deductions or credits that will otherwise give rise to a refund when filing your 2011 tax return.

THE FORM

If you expect to claim any deductions or non-refundable tax credits that will reduce your tax bill when filing your tax return each year, consider using Form T1213 to request a reduction in the taxes withheld from your pay throughout the year. You can expect a response from CRA in four to eight weeks. If the taxman approves of a reduction in your taxes deducted at source, you simply provide the letter from CRA to your employer, and presto, your taxes deducted will be reduced.

The types of deductions and non-refundable credits can include RRSP contributions, child care expenses, support payments, employment expenses, interest expense on investment loans, carrying charges, charitable donations, rental losses, losses from tax shelters, and more.

You'll find Form T1213 online at http://www.cra.gc.ca, and you'll generally have to file it each year. Get the form and take action today to reduce your taxes withheld in 2011.