Majority Says No to Payday Loans and Tax Discounting

Last month we asked “Do payday loan companies and tax discounting providers still have a place in Canadian financial services?”, and the results are in…

The majority of voters (61.62%) feel these services have no place in the Canadian financial arena, and while many comments back up the majority’s thinking, some readers were in favour of tax discounting: "Tax discounting has its place in both the tax preparation and loan industry. The total cost of discounting a $ 1100.00 refund is $ 85.00…which includes the cost of preparation of the return, regardless of the number of slips or forms involved. For the working taxpayer with dependents, RRSPs, T5/T3, mutual fund investments their professionally prepared tax prep fee without discounting would be $75-100.00 or more. Getting the refund ($1015.00) 2-6 weeks early is a bonus. Saves putting the March Break holiday on the credit card!! The fact that tax discounting rates haven’t changed in 25 years makes it a great program for many of it’s users," states Joe.

Peter weighs in: "People who criticize tax discounting services tend to forget that the fee includes the price of tax preparation. So for a client with a $400 refund, it is costing him $50 to get his tax return prepared and he is getting his money right away instead of waiting two weeks. This hardly seems usurious. For a client with a relatively complex return, it is a bargain."

However, most KBR readers were opposed to payday loan companies. Sheila sums up her opinion succinctly: “These companies should be outlawed!”

Christiane agrees: “These institutions get people into financial trouble and/or worsen their troubles and just shouldn’t even exist.”

Susan comments: “They do not belong in the financial field as they really and truly are loan sharks. People think these services are great, but the only one getting richer from this is the companies that provide this service. A few years ago this service did not exist and people survived until their next pay cheque because they did without until they actually had the money for whatever was needed.”

Although not explicitly in favour of these services, many KBR readers expressed that unfortunately there is still a place for these companies in our society. Brian weighs in: “As “usurious” as these services seem, their legitimate operation allows government officials to keep any eye on them. Without these services the void would be replaced with organized crime and the users of the service would be worse off. Education, not legislation, is the answer. We need to train the public to recognize the true cost (effective interest rate) of the service, so they will try to avoid using it in the future.”

Mitzi-Lynne adds: “I wouldn’t exactly call them a financial SERVICE, but they do still seem to be a necessary part of far too many peoples’ existence. I have tax clients who HAVE to have a refund in order to catch up on their rent. They are devastated if no refund is forthcoming. Hence, they turn to the second and probably only remaining option, the good old payday loan or the truck title loan. The solution: financial education. The problem: the motivation to obtain that education. It’s too much work.”

And the final say goes to Dianne: “Using payday loans and discounting options has been the way clients have been doing their taxes for years. They don’t know anything different. A couple of years ago Ontario changed the way they provide credits and this resulted in many people no longer getting refunds on their tax returns. At first, there was a lot of chaos and angry clients. Education is the key—for every client wanting payday or discounting, tell them the advantages of not using these options—you might get a new client/friend and provide some good customer service.“

Knowledge Bureau thanks the 198 voters who participated in September’s poll. This month’s poll question is: With the opportunity to use pension income splitting in the future to reduce taxes, is investing in a spousal RRSP still a good idea? Let us know what you think!