Winnipeg Free Press - PRINT EDITION

Tax refund burning a hole in your pocket? Put it to use

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Before I begin my lecture about making maximum use of your income tax refund, let me relate some trivia.

These are courtesy of CRA, Statistics Canada, CBC and the Knowledge Bureau, from the 2012 tax year.

About 17 million taxpayers will receive refunds this year, with the average about $1,600. That's an amount that is worth investing, reducing debt, or otherwise putting to good use.

CRA collects some $120 billion in personal income taxes from the 25.5 million people who file. (Remember, even though you got a refund, you probably still paid income taxes.)

The top one per cent of income earners (254,700 people) paid 21 per cent of the total taxes collected, though the top one per cent accounts for just 11 per cent of total personal income. This suggests the progressive tax system works. Let me explain.

The top one per cent pay much of their income taxes at the top rate, between 43 per cent and 50 per cent in all provinces but Alberta. Their median income was $283,400 and their median taxes paid were $90,100, for an overall tax rate of about 32 per cent.

For the 99 per cent of the rest of us, the median tax paid was $1,800, with an overall tax rate of 6.3 per cent. (Median means half were above this and half were below.)

The big difference is that the median income for the 99 per cent was $28,400, with half of filers above that and half below.

On the donation front, $8.3 billion was donated to charity, with an average claim of $1,437. We know the average is higher in Manitoba, home of the most generous contributors.

Now, let's talk about that refund, remembering this was an interest-free loan from you to the government.

First, tackle any high-interest debts, such as credit card balances. Rates of 18 per cent or higher can still be found, and making only minimum payments on such balances takes 20 to 30 years to pay off.

The next choice is loans on which you are paying interest well above the expected rate of return on investments. By this, I mean loans at six to eight per cent or higher.

When you get to loans with interest rates close to prime, or mortgages in the range of three per cent or four per cent, RRSP contributions may become attractive, if your taxable income is above, say, $35,000. Above that, each $1,000 contributed to an RRSP will save you $270 to $460 in taxes when you file next year's tax return. It will also put that money to work now in the form of an investment.

If you have kids, another way to get more money back from the government is to make a contribution to an RESP. The first $2,500 per year contributed per eligible child will result in a 20 per cent government grant into the RESP, added to the money growing to pay for future education expenses.

If you're in great financial shape, then consider using some of that refund for a splurge, like next year's winter vacation. (But you probably already thought of that!)

People who get large refunds (in the absence of things such as tuition or large donation receipts) should take steps to pay the government less through the year, either by decreasing paycheque withholdings (CRA form T1213) or by making smaller quarterly instalments.

That way, you can put your money to work for you throughout the year, or to pay for things such as fees for water-pipe thawing and car-suspension repairs.


David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management and an author.

Republished from the Winnipeg Free Press print edition March 14, 2014 B13

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