The Statistics Canada’s Individual Income Tax Report*released on January 8, highlighted just how much Canadians are being over-taxed by the CRA. With average tax refunds coming in at $1,757 for the 2018 filing season, many taxpayers are effectively providing the government with interest-free loans of approximately $150 per month for up to 16 months before they see their refund. Just how much is that really costing you?
Consider this: $150 a month could help you take advantage of investment opportunities or pay down debt. Investing the money in a TFSA at a 5% return would earn almost $50 in interest over a 12-month period. While that may not sound like much annually, it’s significant over the long-term if that investment is allowed to grow. The earnings are tax-free along the way and when they are withdrawn, too.
If the money was put into an RRSP, almost immediate tax savings would result, at the taxpayer’s marginal tax rates, provided the taxpayer is age-eligible and has RRSP contribution room. A spousal RRSP opportunity may also be possible. This opportunity brings with it the possibility of reducing withholding taxes throughout the year, using Form T1213.
Likewise, if taxpayers used that $150 monthly payment to reduce debt — particularly high-interest consumer debt — instead of giving it up to the CRA in overpayment, that could make a significant financial impact. Especially when you consider that the average interest rate for credit cards in Canada is 19%, and that number continues to rise. The benefit is exponentially positive, given that interest on consumer debt is not deductible.
Many Canadians celebrate their refund cheque as though it’s free money when, in reality, money collected through over-taxation should have been theirs all along. Lacking access to it therefore has a negative impact on their financial future – making the tax refund a foe, not a friend, to financial planning goals.
To prevent these repercussions seek out the services of a certified professional in tax-efficient debt management or a Real Wealth Manager, who can help you coordinate financial plans with tax filing priorities. It’s important to reduce CRA’s reach up-front, and control whether the correct amount of tax is being paid on a regular basis.
Consider the following implementation tips:
Advisors helping taxpayers through this process can do more than simply manage the logistics; having conversations around this issue creates an opportunity for education. It’s time to start moving the needle and help Canadians better understand the complex tax issues that impact their wealth.
The Statistics Canada Individual Income Tax Report*
Additional educational resources: There’s still time for advisors to learn more about advanced tax-filing fundamentals that will impact their clients’ wealth in the new year. Join Knowledge Bureau for the CE Summits, starting in Winnipeg on January 17 and visiting five other Canadian cities by January 25, when the tour ends in Vancouver. Can’t attend in person? Knowledge Bureau’s online programs and courses can fill in the gaps!
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