The trouble with tax refunds

Don’t give the CRA an interest-free loan!

Statistics Canada’s Individual Income Tax Report* released on Jan. 8, highlighted just how much Canadians are being over-taxed. With average tax refunds coming in at $1,757 for the 2018 filing season, many taxpayers are effectively providing the government with interest-free loans of approximately $150 per month for up to 16 months before they see their refund. Just how much is that really costing you?

Consider this: $150 a month could help you take advantage of investment opportunities or pay down debt. Investing the money in a Tax-Free Savings Account (TFSA) at a 5% return would earn almost $50 in interest over a 12-month period. While that may not sound like much annually, it’s significant over the long-term if that investment is allowed to grow. The earnings are tax-free along the way and when they are withdrawn, too.

If the money is put into a Registered Retirement Savings Plan (RRSP), almost immediate tax savings would result, at the taxpayer’s marginal tax rates, provided the taxpayer is age-eligible and has RRSP contribution room. A spousal RRSP opportunity may also be possible. This opportunity brings with it the possibility of reducing withholding taxes throughout the year, using Form T1213.

Likewise, if taxpayers used that $150 monthly payment to reduce debt – particularly high-interest consumer debt – instead of giving it up to the CRA in overpayment, that could make a significant financial impact. Especially when you consider that the average interest rate for credit cards in Canada is 19%, and that number continues to rise. The benefit is exponentially positive, given that interest on consumer debt is not deductible.

Many Canadians celebrate their refund cheque as though it’s free money, when in reality, money collected through over-taxation should have been theirs all along. Lacking access to it therefore has a negative impact on their financial future – making the tax refund a foe, not a friend, to financial planning goals.

To prevent these repercussions seek out the services of a certified professional in tax-efficient debt management or a Real Wealth Manager, who can help you coordinate financial plans with tax filing priorities. It’s important to reduce CRA’s reach up-front, and control whether the correct amount of tax is being paid on a regular basis.

Consider the following implementation tips:

* Fill out a TD1 for your employer’s payroll department, outlining tax credits and deductions you’re likely to claim. Payroll deductions can be adjusted accordingly. This often needs to be requested, as most companies don’t routinely provide these forms to new hires.

* Update your employer on significant life changes that may impact the amount of tax to be withheld (child or spouse no longer a dependent, for example).

* Inform your employer if you have more than one employer in the same tax year. This could affect your tax-exempt basic personal amount. Otherwise, if a new employer assumes this applies, under-taxation could occur, and you’ll owe money you weren’t anticipating.

* CRA can give approval to an employer to collect less tax in cases where employees are making RRSP contributions or claiming significant childcare costs, for example. An advisor can help you make the right moves in order to ensure only the necessary taxes are being withheld.

* The Statistics Canada Individual Income Tax Report

Evelyn Jacks is the founder and President of Knowledge Bureau, which brings continuing financial education in the multiple areas of specialization to advisors and their clients. She is the author of 52 books on tax and wealth planning. This article originally appeared in the Knowledge Bureau Report. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.