Make tax refund ‘smart money’
Paying down debt, contributing to an RESP or RRSP may be best options
You could look at it like winning the lottery, other than the fact the winnings are just your own money the government has been holding.
The deadline for tax filing, without penalty if you owe the government money, has passed and soon many Canadians will be eagerly anticipating the cheque coming in the mail. The smart ones will have opted for direct deposit so they can spend the money right away.
How to spend the cash is the big question. Should you pay down debt, now at a record high for the average Canadian? What about making an RRSP contribution, a good way to ensure you get another tax refund next year? Or maybe an RESP: Chipping in for your children’s education comes with 20% matching grant per child per year on the first $2,500.
More than half of Canadians will be getting some type of refund this year
More than half of Canadians will be getting some type of refund this year and the average amount is usually around $1,500.
A Bank of Nova Scotia survey found 23% of Canadians plan to use their 2011 tax refund either to deposit or reinvest, while 22% will pay off debt. The same survey found 25% expect no tax refund at all.
“It’s great,” said Mike Henry, senior vice-president of retail payments, deposits and lending with Scotiabank, about the intentions.
“I think the key is for people to make sure that they have a plan. Spending is an absolutely OK thing to do with the tax refund as long as it is a conscious choice as part of your overall financial plan.”
Cleo Hamel, a senior tax analyst at H&R Block, says consumers are often in a financial bind at tax time and take advantage of the fact many tax preparation companies will give you your refund up front for a fee.
“I’ve had some interesting stories,” Ms. Hamel says, about what people want to do with their refund money. “I had a young man who needed the money right away because he wanted to pay off the balance on the engagement ring for his girlfriend. We hear everything. Sometimes it’s just needing the money for rent because they are in dire straits. Sometimes it’s the down payment for a car or something.”
The really smart Canadians don’t get any tax refund at all because getting money back means you’ve been paying too much all year.
“While a l ump-sum payment can come in handy for Canadians, a large tax refund could be a result of poor tax planning throughout the year, and could be costing you more money than you think,” says Aurele Courcelles, director of tax and estate planning at Investors Group.
“There is actually a benefit to avoiding a large tax refund and investing the money for yourself. Plus the longer you leave the money invested, the more the benefits will continue to add up.”
A $1,200 refund invested at a pre-tax rate of return of 6% would be worth $1,233.56 by the end of the year if the person had invested $100 per month over the course of 12 months, Investors Group points out.
Al Nagy, an Edmonton-based certified financial planner, says it’s not always that easy to convince clients to follow a plan.
“I always have great ideas for people before they do their taxes, it’s a question of following up on it,” he says. “You can lead a horse to water but ... they either respect the plan you put in place or they don’t.”
Mr. Nagy says his No. 1 priority is high-interest credit cards. If a client has children, his second choice is an RESP because of the matching funds from the government.
“Think about what a double whammy that is: You get a government refund, put it into an RRSP and you get 20% on top of it. That’s really smart money,” Mr Nagy says.