There its done and your 2016 tax return is filed just in time for the May 1st deadline. You even had an extra day this year. Now you wait for your refund. Its seems to be a right of passage each year, everyone waiting on the tax refund. What a smooth operation the Canada Revenue Agency (CRA) has here… collect your taxes through the year and then repay any excess months after they received it. Well, sort of.
Canadians have become endeared to the idea of getting a tax refund. A March 2016 poll for TD Bank (by Environics) found that 57% of respondents expected some kind tax refund in 2015 and 61% of those expect to get up to $1,500. You should know that if your getting a tax refund, it probably means you’re a bit gullible. You’ve been providing Ottawa with a tax-free loan for months. One tip: Why wait? Consider direct deposit instead of waiting for that cheque. It might mean a couple fewer days on an interest-free loan for Ottawa.
Think about it. Would you like me to make deductions from your pay cheque all year long if I promise to pay you your money back in May with no interest? I didn’t think so.
For some, the tax refund is used as a forced savings strategy. They’re essentially letting the government hold onto their money because they think that they’ll spend the extra money on their own through the year. Well, that’s they way they like to excuse it. The problem is that the only one who benefits from this is the government. Using a tax refund as a deferred savings strategy so you don’t blow it is not an optimal strategy.
What a lot of people don’t realize is that there is a better option. You can reduce the taxes withheld from your pay at the source: CRA has a form that you can present to your employer: T1213 Request to Reduce Tax Deductions at Source. The amount of tax that your employer is withholding from your pay may be higher than necessary for a variety of reasons from not factoring in your regular RRSP contributions to charitable donations.
Of course, the issue then becomes, if you are waiting on your tax refund, what happens when the refund comes. Here’s a concept… how about making sure you do something with the monies refunded from your CRA savings account? Alright that sounds like a good idea. But how do you that? You start by earmarking that refund money for expenditures that might have a lasting effect on your future.
My go to is for those people carrying debt with high interest rates. Investing and divesting debt is all about playing the interest games. Anything with an abnormally high interest debt is a no brainer. If you’re paying 28% on an overdue credit card, where else can you get that return with your tax refund? The challenge going forward is not to use the valuable refund to pay off or pay down a credit card and then go out and spend again racking it back up. If an endless circle and you be right back to having a debt and then no refund to pay it off again.
Fund an emergency fund
Having talked about debt, it understood that a lot of people do not have short term savings set aside as an emergency fund. If not, now is the time. People often overlook having a minimum of three months, ideally six months, to cover expenses. The truth is that when things do happen unexpectedly, people turn to credit to fund those emergency needs. It could be a new furnace or unplanned car repairs. Without an emergency fund, people turn to credit cards, lines of credits, no loans.
Contribute to your RRSP
Try the old in out and tuck your tax refund directly into your RRSP for 2017. Any investment gains from the money become immediately sheltered and you’re already on your way to a refund from your 2017 tax return. Alternatively, if your income does not really allow you to benefit from deferring taxes by way of an RRSP, consider a Tax-Free Savings Account (TFSA), where investments and their gains are sheltered for life and access to the money is unimpeded by penalties.
How about the government giving you more money then just your refund? If you have children, a contribution to a Registered Education Savings Plan (RESP) of up to $2,500 per child per year will get you a 20% return, of up to $500 per year per child. If you are disabled or have a disabled child, a contribution to a Registered Disability Savings Plan (RDSP) will see the government match your contribution with a grant worth from 100% to 300% of what you just deposited.
Ensure family protection
This may be me talking but, in my opinion, everyone with children should have life insurance. It is certainly a topic of discussion that makes people uncomfortable. But we need to have that conversation. If you’ve got money coming from a refund, it means you can afford to earmark a certain amount of cash each month for an insurance policy. I’ve lost count of the social media campaigns to raise money for people who left behind children with one parent and no means to carry on financially at the same standard of living. That’s a legacy you don’t want to leave.
You may not have had money before for a project that desperately needed to be done and your refund cheque will get you started on that. More often then not, people who do not have an emergency cash flow or have budgeted and scheduled required home repairs, will delve into credit to pay for it. Then they have the debt to repay plus interest. So the primary advice is plan your home repairs and maintenance to the best of your ability and have cash saves for the rest.
Notice I titled this as needed. Many people will use the tax refunds as a windfall and spend it on a vacation. It might not be popular, but spending the money on something you’ll remember your whole life has value beyond dollars and cents. But, he does caution against just blowing the money on a meaningless trip. That said, we all need downtime and should take vacations, However, the best way to pay for that vacation is to plan it and then set aside money for the trip over time. You’ll come back feeling more rested knowing that you haven’t had to use your refund or financed your trip away.
Finally, depending on the size of the refund, it may be a good idea to use it for multiple purposes. Try topping up your RRSPs and use the residual in your children’s RESP. There’s nothing to say a little money can’t go to all the things mentioned above.
Planning ahead and having tax reduced at source for items that you know will create a tax refund is the best move. Keep your money and don’t loan it to Ottawa for several months. The second-best move is to use the refunds to invest in meaningful and long term value. Its easy for people to have that refund deposited into their bank account or receive it in the mail and treat it as found money. Working with a financial life advisor can alleviate having to have that tax money refunded and to ensure funds are used optimally in your specific plan. This is one strategy for Keeping Life Current.