Canadians still love their tax refunds – even if it is a sign of poor tax planning. A new CIBC poll finds that more than half (53%) of Canadians have already received or expect to get some money back for the 2018 tax year. As of last week, according to the Canada Revenue Agency tax-filing season data, the CRA has received just over 13 million personal tax returns with the average refund being about $1,610.
According to the poll, 63% view their tax refund as a “windfall of unexpected money” to put toward their goals. Most will use the money to either pay down balances on credit cards and loans (20%) or cover everyday expenses (20%), rather than invest (12%), while 22% don’t know what to do with it. Almost 40% of those polled have “no idea” what their tax situation will be until they’ve reviewed their paperwork with an expert
At this time of year many people are filled with “intaxication” – a term I use to describe the short-term euphoria of getting a tax refund that fades when you realize you’re getting your own money back. A better plan is to ensure your portfolio operates as tax-efficiently as possible to keep more of your money throughout the year. Now is the perfect time to talk to our clients about how to make the best use of their 2018 refund to meet their goals and plan not to get a refund next year.
For example, one strategy is to have clients reduce their taxes on every pay cheque, instead of waiting until their return is filed the following spring to get a refund. By completing Canada Revenue Agency’s one-page form, T1213 “Request to Reduce Tax Deductions at Source,” the taxpayer can indicate various deductions or credits that, if not taken into account, would otherwise result in a tax refund for the year. Examples include contributions to RRSPs or childcare expenses.
In addition, Canadians use various investments to help grow their money, but many are in the dark about the implications on their tax bill. In fact, according to the poll, the majority of those Canadians don’t know that all non-registered investments aren’t taxed the same way (76%), or that all investment income isn’t taxed at their full marginal rate (80%). More than half (51%) don’t realize that they’re required to even pay tax on the interest income they earn in an everyday savings account.
Tax season is the perfect time to discuss the taxation of investment income with your clients, reminding them of the benefits of Canadian dividends and half-taxed capital gains. Indeed, 77% of poll respondents didn’t know that Canadian dividends received from Canadian companies such as banks or through mutual funds and ETFs are taxed at a preferred rate thanks to the dividend tax credit.
When asked about taxation of Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), Canadians fared a bit better. Most (70%) knew that they don’t pay any tax on income earned in an RRSP until it’s withdrawn from the plan, though fewer knew (53%) that income earned in a TFSA is completely tax-free when the rules for these plans are followed.
It’s clear from these poll results that financial advisors continue to have a huge and valuable role to play educating our clients about how taxes affect their after-tax returns and helping them keep more of their money throughout the year.