Financial: Why You Don't Want a Tax Refund

It always feels good to get a tax refund cheque – but the reality is that it would be much better for your long-term financial health if you never again get a tax refund. You see, that refund isn’t a gift from the government – it’s your money that you overpaid in taxes that the government has had for its use, interest-free. So, instead of working for you this year, your money has been working for the government.

The bottom line is this: getting a refund is not good tax planning. Here are a few tips that will help you keep more of your money working for you to help you reach your financial goals. And, if you did get a tax refund this year, here are some great tips for using that money to enhance your financial future.

How not to get a tax refund

Keep more of each pay by reducing the amount of tax withheld. Each pay period, a portion of your paycheque is withheld and sent to the Canada Revenue Agency (CRA) to cover your estimated year-end taxes. That amount may be excessive and you can apply to have it reduced by submitting a T1213 form to CRA. By trimming your withheld tax you’ll keep a few extra dollars each month that you can invest for your own benefit.
Pay tax instalments on time. If you are on a quarterly personal income tax payment schedule, your instalments are due on the 15th of March, June, September and December. Be sure to make your payments on time to avoid penalties and interest. But if you think your income will be lower than in prior years, check with your accountant before making a payment to see if it should be reduced.
Get an early RRSP deduction. One of the most common reasons for a tax refund is your Registered Retirement Savings Plan (RRSP) contribution. At tax time, you simply deduct the amount of your contribution from your taxable income and get a refund. But, if you’ve made that contribution earlier in the year, you can apply to the CRA using form T1213 for a Letter of Authority that will permit your employer to reduce the withholding taxes on your regular paycheque based on the amount of your RRSP contribution. And, if you make RRSP contributions through payroll deductions, you don’t even need a Letter of Authority – just ask your employer to adjust your tax withholding to reflect your RRSP payroll contributions.

How to profit from your tax refund

Pay down high-cost credit card debt, especially those very expensive department store cards. Or make an extra mortgage payment and save on interest. If you’ve taken out an RRSP loan, use the extra tax refund to help pay it off as soon as possible.
Maximize your RRSP contribution. The more you contribute, the faster your retirement nest egg can grow. And if you have contribution room from past tax years, use your refund to top-up your RRSP and you’ll save even more on taxes.
With your debt under control and your RRSP topped up, consider adding to your non-registered portfolio. Capital gains inclusion rates are lower now and that makes it much more appealing to hold assets that appreciate in value, such as stocks and equity mutual funds, outside an RRSP.

There are plenty of other ways to get your money working for your financial benefit. A financial planning professional can help you make the best tax-planning and investment decisions for your personal situation.

(Submitted by Damon Smith, Investors Group Financial Services Inc. For more information call 888.335.1362).

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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