Tax refund bad sign
In a perfect world, you shouldn’t be getting any money back
All of us expecting tax refunds this spring are throwing away money.
If you are considering going to a tax-preparation company that will front you the cash from the government, you’ll only be compounding the error.
In a perfect world you should not be getting any tax refund.
“I say it every year. Avoid getting a refund, it’s a sign of poor tax planning,” says Jamie Golombek, managing director of estate and tax planning at CIBC Private Wealth Management.
There is nothing to prevent you from going to your employer and asking it to subtract less taxes because your personal situation has changed and you have new deductions for something like child-care costs.
Some items will have to be pre-approved by Canada Revenue Agency before your employer will lower the deduction. For example, pre-authorized RRSP payments can be demonstrated to CRA and it will send you a letter to present to your employer to lower your deductions.
“It’s a piece of cake, generally,” Mr. Golombek says.
There is no question some people like the idea of the refund — sort of a forced savings plan. But it does come at a cost, an interest-free loan to Ottawa. Nice deal, if you can get it.
Last year, a Canadian Imperial Bank of Commerce poll found more than half of Canadians expect a refund, with CRA saying that refund would average $1,506. Some of those people are going to want to get their hands on the money right away, and will go to a tax-preparation service which offers to pay the cash up front.
Avoid getting a refund, it’s a sign of poor tax planning
The instant cash-back option comes with a heavy price. On the first $300 of your refund you get 85¢ on the dollar and then 95¢ on everything on top of that. The fee levels are legislated by the federal government.
“If you are expecting a significant refund, don’t do it,” Mr. Golombek says. Why would you do it? With direct deposit, you can file your return and get the cash in five to seven business days — avoiding snail mail obviously shaving days off the process.
“The only reason to do this is if you have a bill coming up in which you’ ll have a late-payment fee or you’ll ruin your credit rating,” he says. “There is no amount of interest that you are paying on any type of loan that could equate to this amount.”
Yet, people still do opt for the upfront cash. About 40% of H&R Block clients opt for the cash back, says Cleo Hamel, a senior tax analyst at the tax-preparation company.
In some instances, the impact would be blunted because firms do not charge a fee for the tax preparation if they’re making money on giving you the tax refund up front. For instance, a $1,000 return would mean an $80 fee, not much more than the basic $60 fee charged by H&R Block.
But think of it this way. If you withdraw $1,000 from the ATM and the bank charged you $20 for the privilege, how would you feel?
“With direct deposit, you might get it in eight or nine business days,” says Ms. Hamel, adding some people are just in dire need of cash. “For some people, having the money today makes all the difference.”
You can walk out of one of its offices with a money order or a debit card, provided you have a basic return and have no outstanding prior debt with CRA.
Scott Hannah, the Vancouverbased chief executive of the Credit Counselling Society, says desperation is sadly all too common among Canadians.
“The most it could take is maybe 30 days, and you look at it and think how are you going to make 5% in 30 days,” says Mr. Hannah, who compares it to the desperation people have with payday loans.
“Lots of people live paycheque to paycheque and they just want that money,” Mr. Hannah says. “If your refund is high, say a couple of thousand dollars, and it’s 100 bucks.”
Your goal should be to get a minimal refund but failing that, should you really be so desperate to get that cash that you’ll pay that high a fee?