Taking the ‘fun’ out of refund

Hey there, time traveller!
This article was published 15/05/2021 (1959 days ago), so information in it may no longer be current.

Keith Laing had to wait until he was retired to partake in a spring financial ritual millions of Canadians enjoy annually.

That is relishing in the mild euphoria of a tax refund.

“Up until this year, I hadn’t had a refund in years,” says the 64-year-old Winnipegger, who “used to run into burning buildings for a living.”

Laing isn’t exactly rolling in refund dough, receiving about $400 back from Canada Revenue Agency (CRA).

Yet it’s a welcome outcome from past years when he owed the government money.

Still, his refund is far below the national average for tax refunds this year, based on recent data from Statistics Canada: $1,845.

That’s a nice chunk of change that could certainly bankroll a lot of fun.

Yet a new survey has found many Canadians are reasonably prudent with their refunds.

“We did this study during tax season, and one of the questions was: ‘What will you do with the tax refund you will be receiving?’” says Aurele Courcelles, assistant vice-president of tax and estate planning at IG Wealth Management.

The results made the accountant’s heart sing (a wee bit): 35 per cent noted they would save or invest the refund while 32 per cent planned to pay down debt.

“That’s just over two-thirds of Canadians planning to do something…” responsible.

Others — 11 per cent — plan to pay for renovations, which Courcelles notes is also financially beneficial given upgrades are likely to increase a home’s value.

Still, 14 per cent noted they aim to keep the ‘fun’ in refund, and use it for travel, presumably a holiday.

“I guess people are getting cabin fever,” Courcelles says in reference to the fact travelling is challenging amid pandemic restrictions.

“Maybe a lot of people are thinking they may travel this winter, or the one thereafter, and they’re putting the money aside now.”

Again, that sounds like a relatively sound savings strategy. Still, the survey seems to beg the question: ‘What’s the best use of a tax refund?’

Maybe not vacations, Courcelles replies.

“I’m not going to argue from a sanity perspective that people may need to get away and try to resume some sort of normal life, but from a financial perspective, it’s probably not the best way to use a tax refund.”

Then again, he notes getting a refund and investing the money is still not the best strategy when it comes to refunds. Rather, the best approach is aiming for no refund at all.

Hold on… let the man explain.

“You got a refund for a reason and that’s because you made an interest-free loan to the government, and that’s because you had too much tax withheld at source.”

Courcelles further notes the best strategy is to figure out how much your average refund might be and then, annually, fill out a tax form to have less income tax taken off your paycheque.

(That form, by the way, is the T1213 Request to Reduce Tax Deductions at Source — which really rolls off the tongue.)

Filling it out “frees up more cash flow for you throughout the year, so you can make more regular savings, or to pay down debt,” he says. “These are all the things you planned to do with your refund anyway, only sooner than later.”

All you have to do is figure out what the big source of your typical refund might be in any given year — like RRSP contributions. Then determine how much those contributions will decrease in your taxes; file the T1213 form to CRA, and once approved, provide it to your employer, who will reduce taxes on each paycheque you receive throughout the year.

Easy-peasy, everyone must be doing this, right?

Well, a very unscientific survey of handful Facebook users of the ‘BUY/SELL WINNIPEG’ group didn’t turn up any tax-keeners taking this path.

Still, financial prudence prevails — even on social media.

‘Samantha O’ — not her real name — says she normally uses the refund to pay student debt and other bills.

“This year I received quite a bit less on my return.” She adds that’s likely the result of receiving CERB (Canadian Emergency Response Benefit), income that was not taxed at source, meaning a little more tax had to be paid upon filing her return.

Another user — also anonymous — noted he used the refund to pay for car repairs (still pretty responsible).

Laing, by the way, was also among those Facebook users and plans to invest his refund in a TFSA.

One more, a financial advisor — not cleared to talk to media by his employer, so also anonymous — says he got a refund several times the aforementioned national average.

The reason being he deliberately had more tax withheld at source to avoid owing taxes upon filing.

He seems to have overshot the mark a little.

Even he admits, when he “puts on his financial advisor hat on” (they have hats?!), that the ideal strategy is having as small a refund as possible with more tax withheld at source to put more money in your pocket sooner.

That said, like Courcelles, he recognizes following this best financial housekeeping advice may not ‘bring you joy,’ to quote decluttering-guru Marie Kondo.

In turn the mystery financial advisor offers a middle-ground approach.

Don’t worry about the form, but do try to use some refund cash wisely.

“Save a third; spend a third, and invest” the rest, he writes.

After all, keeping a little ‘fun’ in refund might just be the best investment you can make in these challenging times.