Average Tax Refund $1600 – Invest It Wisely to Win in 2013

There are lots of ways to do better for yourself at tax time; starting with the filing of your tax return as soon as possible if you missed the April 30 deadline.

You’ll be subject to a late filing penalty if you have a balance due, plus interest, so do get it done this week to avoid possible gross negligence penalties of 50% more. Working together with your tax and financial advisory team is critical to maximize your opportunities—especially if you find you have a tax refund coming. The odds are very good in fact, that you do. 

As of April 25, CRA had processed 43% or 15.7 million personal tax returns out of the over 27 million that are expected to be filed. Two thirds of them resulted in a tax refund, with the average refund amounting to about $1600. That’s just over $133 per month that Canadians fork over in advance to the government without earning any interest on the prepayment. That’s a big number. You can turn that around by working with tax and financial advisors who take on the role of financial educator.  

Here are six ideas on how to get ahead with your tax refund and making yourself aware of new tax changes from the most recent federal budget:    

1. Pay yourself first. If you take Canadians’ average tax refund of $1600 and multiply that lump sum by 40 years in an average working lifetime, that’s $64,000 – new found money you can invest to buy yourself some financial freedom.  For example, if you could invest that $133 a month in a Tax Free Savings Account (TFSA) at a 2.5% rate of return, you would in fact have $109,743 in savings, based on Finance Canada’s TFSA calculator. So, it’s very important to invest more of the first dollar you earn. Start now by contributing your tax refund into a TFSA. Then if you have RRSP contribution room and are age-eligible, ask your employer to transfer $133 a month to your RRSP instead of to the government in source remittances. This will reduce your taxes for 2013, but on every paycheque instead of waiting until the end of the year.

2. Invest your Refundable Tax Credits. Leveraging your tax refund into an RRSP can also increase your monthly Canada Child Tax Benefits. Those benefits are based on net family income, so you want to find ways to reduce that number to increase your benefits. Then, once you receive the benefits, try to save them in an account in the name of the child. Resulting earnings will be taxed in the hands of the child. This is a great way to avoid taxation legitimately and save for university. Consider making an RESP contribution to benefit from the Canada Education Savings Grant as well.

3. Split retirement income. It’s important for seniors to keep their eyes on their net income as well. If you are in danger of losing part of your Old Age Security to a clawback because your income is too high, it’s important to find ways to split or equalize pension income sources. You can, for example, assign some of your CPP Benefits to your spouse, if you are both at least 60, to split this income evenly. You can also elect to split up to 50% of private pension income, depending on type and age. And you can invest in a spousal RRSP to create future income splitting opportunities. Your tax advisor can do some “what if” scenarios for you and optimize prior filings in some cases.

4. Give to Charity in 2013. There is a new First Time Donors Tax Credit for taxpayers who have never claimed a donation tax credit or whose last donation was in 2007. You will get a non-refundable tax credit of 40% of donations under $200 (that’s a real return of up to $80) and 54% for donations between $200 and $1,000. In the case of a $500 donation, for example, you’ll get back $242 dollars on your tax return (40% x $200 = $80) plus (54% x $300 = $162) for a total of $242. That’s a 48% return for helping your community.

5. Small Business Dividends will attract more tax in the future (about 2% at top rates), so managing your tax refund is important if you are a small business owner. Be sure to offset your increased taxes with an increase in your RRSP contributions, if you have the contribution room. Your tax advisor can help you with the determinations.

6. Hobby Farmers will get a tax break in 2013 – deductible restricted farm losses will increase to $17,500 ($2,500 plus 50% of the next $30,000). It’s already May, so doing a preliminary tax calculation for 2013 is important so that you get your quarterly tax instalments right. The next one is due on June 15 and if it’s based on last year’s income, you will want to adjust the amounts payable downward in these cases. That’s new money for investment purposes, too.   

It’s Your Money. Your Life. Make the time value of money work for you, instead of the government. Managing your tax refund and applying tax changes to your cash flow calculations will make a big difference to your ultimate wealth.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.