April 30 is like Christmas Day for many accountants. It means that the weeks of working late nights and weekends are behind us and we are now free to finally enjoy spring. Many non-accountants are usually happy as well because they receive a refund once their tax returns are filed. However, an income tax refund is not really an occasion to celebrate.
Here are some reasons why a tax refund is not a good thing:
- You have given the government an interest free loan. Your money could have given you a better return by doing things like paying down credit cards and other debt, saving in a high interest savings account, or investing inside a tax-free savings account (TFSA).
- You lose a lot of money if you sell your refund to tax preparation companies like H&R Block or Liberty Tax Service. These services often take 15% of the first $300 of your refund and 5% of the balance. This means, for example, that your $1,000 refund actually puts $920 in your pocket.
- You may be tempted to spend your refund on a big ticket item instead of saving, investing, or paying down debt.
Some may argue that a tax refund is a good thing because it essentially a forced savings plan when you have extra tax taken off your regular paycheque. However, if you are the type of person that needs a forced savings plan in order save money then there are better options. Most banks offer some sort of automatic investment plan that allows you to save small amounts on a regular basis. You can take advantage of these plans to contribute to an RRSP, TFSA, purchase mutual funds, or save money in a high interest account.
If you’ve read this far, you may now agree that a tax refund is not a good thing. Here are some things you can do to minimize the amount of tax you pay to the government throughout the year:
- If you are an employee, review from TD1 from the Canada Revenue Agency (http://www.cra-arc.gc.ca/E/pbg/tf/td1/README.html). You fill this form out and submit it to your employer each time you start a new job or your personal circumstances change. The more credits you claim on this form the lower your income tax deduction will be on each paycheque.
- If you regularly claim income tax deductions such as RRSP contributions, child care expenses, interest, and employment expenses, then you can complete and submit form T1213 from the Canada Revenue Agency (http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html) to request a reduction in the amount of income tax deducted from your paycheque.
- • If you are the owner of an incorporated business, call your accountant to review options such as salary versus dividends, shareholder draws, and bonuses.
Celebrate spring with your accountant by paying less tax and putting more money in your pocket instead of lending it to the government.
Written by Jeff Ross, CPA, CA