Moneywise: Tax refund not necessarily good but use it well if you get one

As the tax filing deadline approaches, many Canadians may be busy rounding up receipts and sitting down with pen and paper, opening up their tax filing software on their computers or meeting with their accountants or tax company to prepare their returns.

Many tax filers will end up getting a rebate from the government which they then can use as they see fit – spend, pay off debt and loans, invest, or save for their retirement or children’s education.

In the 2012 tax year 26.1 million Canadians filed tax returns and the average refund was $1,641.

“Lots of people don’t factor a refund into their financial plan and end up spending it on their passion of choice — a trip or some new golf clubs,” says Angelo Mantzios, a financial adviser with Sun Life Financial Canada in Mississauga, ON.

“We would encourage them to look at their financial situation and use it to pay down debt or tuck it away for retirement in their RRSP or Tax Free Savings Account (TFSA),” he says.

“There are a lot of responsible things you can do with your refund. It all comes down to your financial plan and your understanding of your particular financial situation.”

While getting a rebate may seem like a gift from the Canada Revenue Agency it actually can be the result of some not-so-effective tax planning.

A tax refund typically occurs when the amount of tax owing on your return is less than the amount of tax withheld from your income during the year. Employment income is the most common type of income from which tax is deducted at source and therefore employees are the tax filers who are most likely to get refunds each year.

There are two main ways employees can reduce their tax at source.

The first is by making sure that the credits your employer uses to calculate your payroll deductions are up to date.

The TD1 personal tax credit return sets out the personal tax credits you intend to claim when filing your tax return and helps determine how much tax is deducted each pay period.

If your personal tax credits have changed since you were hired you should re-submit the form so that taxes withheld at source can be adjusted for the tax credits beyond the basic personal exemption.

You also can apply to get your tax refund paid throughout the year on every pay cheque instead of waiting until after your return is filed by completing the T1213 request to reduce tax deductions at source form.

On the form you indicate your regular RRSP contributions and other deductions and credits to be taken into account when your employer calculates the tax that will be withheld from your pay.

Other taxpayers will use the RRSP as a way to minimize or even reduce their income tax payable to zero.

Lower income earners who don’t make enough money to take full advantage of the tax benefit the RRSP can offer may just put enough in their RRSPs to reduce their tax payable to zero and then put excess money if they have it into other accounts such as a TFSA or a Registered Educational Savings Plan (RESP), which has tax deferred growth like an RRSP plus a government grant, to save money for their children’s education.

The important thing is to use all the tools available to you to minimize the amount of tax you pay. Consider your financial goals when deciding what to do with your tax refund if you get one, but it might even be better to eliminate that tax refund altogether and use the taxes saved throughout the year to your benefit.

“If you’re so inclined you can do your tax return yourself, but if not find someone you can trust to do it for you because you want to be sure to use all the tools and programs available to you,” Mantzios says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.


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