Is getting a tax refund a sign of poor tax planning?
By now most of us have filed our tax return. Individual returns were due April 30, while self-employed persons had until June 17 to submit all their paperwork. For many of us, the dread of filing our tax return is often followed by the joy of a big tax refund. But now CIBC says a tax refund is actually a sign of poor financial planning. After all, a refund is your money that you overpaid throughout the year in income tax to the Canada Revenue Agency (CRA.)
But that may be too harsh of a characterization. Even by the results of a CIBC poll on our tax refund situation, the majority of Canadians do get a tax return. Does this mean most of us are bad at tax planning? Now that the anxiety of tax season is behind us, let’s take a closer look and see how we can optimize our taxes for 2019.
Reducing tax at the source
If you have been receiving a large tax refund year after year, and would like that money to stay in your hands, you can ask your employer to deduct the income tax you pay at the source. Do this by completing a one-page T1213 form called Request to Reduce Tax Deductions at Source. You can indicate various deductions or credits that you qualify for that result in a tax refund. You could also do this in a year where you might be making a larger than usual RRSP contribution. Maybe you have room left over from previous years that you want to use now. This does mean that if you make more in overtime or in another job, you may be subject to a tax bill when you file your return. If you find you’re making more money than you anticipated, you have to save accordingly to pay your CRA tax bill.
Invest the money
The CIBC poll found that 63 per cent of us view our tax refund as a “windfall of unexpected money” to put towards our goals. Nothing could be further from the truth. A tax refund is your money that is being returned to you. The CRA has been holding that extra tax you paid, and that money has not been earning any interest for you. If you do get a large refund, the best way to use it is to invest it back into your RRSP. When the money is in your RRSP, make sure to buy an investment that suits your risk tolerance. This does two things: It gets you into the habit of using your tax refund properly and watching it grow in value; and it kickstarts your contributions for next year.
Know your situation
The CIBC poll found that 39 per cent have “no idea” what our tax situation will be until we review our paperwork with an expert. If you are part of this group, change that situation this year. Know what your marginal tax bracket is. That is the income tax you paid on the last dollar you made in 2018. Investigate now all the credits available to you in 2019. For example, there are new credits for people with severe mental impairments to get a service dog; there are credits for those trying to get pregnant using in vitro fertilization; and there are increased credits for capital costs incurred by self-employed workers. By knowing what credits you qualify for, you may be able to plan your year more tax-efficiently.
CIBC called the feeling we get after we receive a refund, “intaxication” – a play on the word intoxication. This may be the case for those of us getting a large refund, but if you use that money for good to pay down debt and invest, then the euphoria you feel from that refund will be worth it.
Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.