Ditch the refund mentality

Why that “bonus” cash isn’t really a reason to celebrate.

Is a tax refund really good news? The reality is that qualifying for a tax refund may be a case of poor tax planning. A refund means you paid more in tax than you needed to last year, essentially giving the federal government an interest-free loan.

According to the Canada Revenue Agency, 62 per cent of Canadians received a tax refund during the 2019 tax filing season. The average refund was in the range of $1,700,^[1] which is no small amount. Some may look at it as an unexpected windfall to help cover post-holiday season credit card debt, or fund a summer family getaway.

But rather than waiting for this annual lump sum, consider opting for a larger regular paycheque. If you typically receive a refund, a review of your household budget, earnings and investment portfolio with your advisor can uncover where adjustments can be made so that less tax is withheld from your earnings during the year.

Refund reset

Registered Retirement Savings Plan (RRSP) contributions, child care expenses and tuition costs for post-secondary education all add up to significant tax deductions and credits. By anticipating these deductions and credits, you can increase your take-home pay each month instead of receiving them in the form of a tax refund.

With your advisor’s help, work through the calculations to determine how much to reduce the tax amount coming off your earnings. Then it’s as simple as submitting Form T1213, Request to Reduce Tax Deductions at Source, to the Canada Revenue Agency (CRA), which authorizes a reduction in the tax deducted by your employer. It takes some time for the CRA to process your request, so consider filling out the form in late summer or early fall to ensure that tax reductions on earnings will be in place for the start of January.

In Quebec, Form TP-1016, Application for a Reduction in Source Deductions of Income Tax, must also be filed with Revenu Québec to reduce federal and provincial deductions.

Smart savings

An annual refund of $1,700 works out to about $140 a  month – a tidy sum that can go towards savings or paying down debt. Here are a few ideas to make your money work for you all year round.

Credit cards - Carrying a credit card balance means your hard-earned money is going towards interest charges rather than savings. Reduce the cost of credit by paying down high-interest debt first.

Mortgage repayment - Boosting your weekly, biweekly or monthly repayment amount has the potential to shave years off your mortgage with little to no pain on your part. Talk to your lender about the penalty-free options available.

RRSPs - Grow that retirement nest egg through a larger monthly RRSP contribution. Even an extra $25 a month can make a big difference in the long run.

TFSAs - Whether it’s a renovation project or a new tech purchase, setting money aside on a regular basis into a Tax-Free Savings Account (TFSA) is an ideal way to save for mid- to large-sized expenses, as well as for your retirement. Your investment growth accumulates tax-free, and the money can be withdrawn at any time tax-free.

RESPs - As the price of post-secondary education keeps increasing, making a regular monthly contribution into a Registered Education Savings Plan (RESP) can help offset tuition costs.

RDSPs - A Registered Disability Savings Plan (RDSP) allows families to plan for the long-term financial security of a relative with disabilities. Regular contributions can add up over time thanks to the power of compounding interest.

Effective tax planning ensures your money is working for you throughout the year. Speak with your advisor to learn more about breaking the tax refund cycle.

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