Every year around this time I undoubtedly face questions from clients, friends and followers a like about whether or not they should be receiving a tax refund and whether or not that is a good thing. My answer is typically… “Well it depends”. It depends because the reason for the refund is important and also what you do with that refund is even more important. So is receiving a refund a good thing?
The reason why you receive a tax refund is because you have paid more withholding tax throughout the year then what your final income ultimately required. Likewise, if you owe money it is because you have not paid enough withholding tax throughout the year based on your level of income and the tax bracket you are in. Another way to look at is if you are receiving a tax refund it is because you have lent the government of Canada a short-term interest free loan… they have had your money throughout the year. Alternatively, owing money means that you have had an interest free loan from the government and need to pay it back at the tax deadline or face a penalty. Based on that logic you might conclude that it is better to owe come the tax deadline and from a personal financial perspective you would be right as long as you have budgeted appropriately for the amount of money you owe. However, sometimes this is out of your control. Full disclosure, I personally receive a tax refund every year. As the owner of a professional business I have business expenses which I can write off against my income which include various operating and marketing expenses along with my RRSP contributions. Since I have taxes withheld against my income the tax write offs I am able to claim, meaning that the government is going to give me some of that pre-paid tax back. Certainly I would prefer to owe money as I have pointed out above but in my situation I have no choice. Many of you, especially those of you who are professionals are in the same boat and in these cases what is most important is that you use your return wisely.
Knowing what to do with your tax refund is an important decision to make. We all remember the days when we were younger, maybe when we were in University or going to college and we received “large” tax refunds. It was “free money!” We know now that it’s not free money, it’s our money but that didn’t stop us from blowing it at the bar or on a spring break trip. Even today, according to a Globe and Mail survey, many of the people surveyed are planning on using the money for something fun like a trip. However, there were also many people who responded that they were going to use their refund to top up their RRSP and TFSA accounts. Using your tax refund in this manner is somewhat like having a government enforced savings plan. Others also responded that they were using their refunds to pay down their personal debts, which as I have talked about in the past is also not a bad idea. So what should you do? As with most things related to your personal finances you should refer back to your financial plan. A good financial plan will make considerations for income tax and how your refunds should be used to further accomplish your goals which are completely subjective. If your priority is retirement planning then re-investing your refund into your RRSP account or into your TFSA account will work towards achieving your goal. If your plan has annual trips built in which you have not allocated the appropriate cash towards yet then using your tax refund towards your annual vacation is a completely responsible use for this money. If you are a business owner and want to use
this money for business building activities then that can make sense as well.
What is most important is that you are not naïve about the facts as to where your tax refund came from. The government is not in the business of handing out free money and this case is no different. A tax refund is your money being returned to you, make sure you use it in a way that helps you to accomplish your goals, whatever they may be. So does receiving a tax refund mean that you have done good budgeting? No, not necessarily but what does make good planning is what you do with your refund.
Note:If you are a professional who has tax deductible expenses and you have income tax withheld on your paycheques, you can have the withholding tax amount reduced on your cheques. By filing a T1213 form to CRA you can opt to have your withholding tax reduced which keeps more of your cash in your hands today and reduces your tax refund later on. For more information on this feel free to visit Service Canada’s website or feel free to reach out to me and I would be happy to chat about your situation. The form requires that you estimate your annual deductions which if you exceed them might mean that you still receive a refund, however, it may reduce the refund that you might have received.
-Grant White, CIM, CFP®
Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.