In February, I read that some 20,000 big-screen TVs were purchased in North America in the week leading up to the Super Bowl. Ever since, I've been afraid that some of our loyal readers might use their income tax refunds in a similar manner.
This article is dedicated to helping you think more carefully about how to spend your refund, and whether you even want one at all. Remember, as wonderful as a refund feels, it is your own money coming back to you. In fact, a large refund is not good money management.
Unless your only proven method of forced savings is to pay too much on income tax withholdings, you are better off to adjust your withholdings if you can. This will keep your chips on your side of the table longer. That way, you (rather than the government) can earn the investment income through the year.
Employees can file a Form T1213 with CRA, giving the payroll officer permission to withhold less tax, if you are making RRSP contributions or have other non-standard deductions. That way, you can get your refund throughout the year.
If you really know that excessive tax withholdings are the only way for you to save (and you would blow any extra income), consider requesting extra withholdings to create a bigger refund.
But put that refund to work when you get it.
Step one? Blow some on yourself.
Yes, that's right; decide right now how much you're going to spend on dinner out, a weekend away, some personal electronics, or something else you've been waiting to purchase. Make it a small percentage of the total, like 10 per cent or 20 per cent, or higher, but stick to your commitment.
Next priority is debts, starting with any high interest, non-deductible amount you owe. If you have credit card balances that carry month to month, snuff them out first. To eliminate the interest, you will have to pay the card off in full at least two months running, but that's one of your best possible investments. The interest rate borders on usurious.
The next priority should be your list of specific goals you have written down for 2008. (If you haven't done that yet, go ahead; I'll wait.)
If your goal was to maximize (or increase) your RRSP contribution this year, then do that now. Remember that a bigger RRSP contribution will create a bigger refund, or at least a lower tax liability. Take advantage of that extra cash to perpetuate the benefit.
If an RESP contribution was your objective, use the money for that.
If getting rid of the mortgage in five years is your top priority, use your tax refund to make an extra payment on that mortgage.
Once all the debts and regular savings programs are taken care of, then that money can start to go to things like the trip of a lifetime or that new set of golf clubs. (Although, at today's prices, you might end up with just a nine iron.)
Here's something new: the Tax Free Savings Account. While this is not yet law, the government has proposed to create a TFSA into which you can deposit $5,000 per year. The investment income earned in that plan will be tax free, and future withdrawals from the plan will also be tax free.
To take advantage of this, you'll need to have $5,000 of liquid cash, so start accumulating it now.
So, in summary:
1. Review your tax return to make sure you have taken advantage of any tax-saving opportunities for 2008.
2. Reduce your withholdings if you can (with permission of CRA to your payroll officer) to account for things like pension contributions or regular RRSP contributions.
3. Use that extra monthly cash-flow to increase next year's RRSP contributions, or otherwise invest.
4. Plan all of your spending this way, not just your tax refund.
And above all, enjoy the "spring" that is bursting forth across western Canada!
By the way, if you filed electronically, don't be concerned if our good friends at CRA request some additional information from you. This is just part of the routine checking process that is required with e-filing, because they don't receive your original receipts and slips along with your return.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca.
PREVIOUS
