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Refund Check

Why your Tax Refund is Bad News

By Isaac Schweigert | March 26, 2015

If you are looking forward to receiving a tax refund this year, I hate to tell you, but you shouldn’t be. Getting a tax refund means you have given the big, bad government an interest free loan over the last year.

They can already borrow at really low rates (around 1% for 5 years), let’s not let them borrow for free!

The average tax refund for 2012 was $1641; that works out to $136.75 per month! If you are expecting a tax refund this year, wouldn’t you rather have had that money throughout last year?

If you are paid twice a month and invested $68.38 on the 15th and the last day of the month in a savings account that paid 1.35%, you would have had $1659 on April 30, 2015 – the tax filing deadline for most people. That’s just a base case for a savings account. If you were planning on investing your refund for the long term (like retirement) and were putting it in a balanced investment portfolio targeting a 6% return, you hypothetically could have had $1723 by April 30, 2015.

What about if you are working on paying down debt?

If you had that refund money through out the year, you could have saved a significant amount of interest. Even on a relatively low interest rate loan (like a $250,000 mortgage at 3%), increasing your semi-monthly payment of $591.19 by $68.38 would save you $1750.71 in interest over the life a 25 year mortgage. If you did this every year, your 25 year mortgage would become at 21 year, 4 month mortgage, and save you $16,641.24 in interest!

So how do you get more of your money early?

If you are expecting to get a tax refund it usually means that your employer deducted more tax from your paycheques than was really necessary.

It’s too late to change this for 2014, but you can make the change for 2015. Its pretty easy to do, all you have to do is complete a 1 or 2 page form and give it to your employer or file it with CRA, depending on the form.

Life events that affect your taxes

  • Birth of a child
  • Return to school (even part time)
  • Got Married
  • Moved in with your partner (now you’re common law and get tax breaks!)

All of these events affect the tax information that your employer uses to calculate how much tax to deduct from your paycheques. You can take advantage of this right away, rather than waiting to file your taxes for 2015 in April 2016. All you need to do is provide your employer with an updated TD1 (make sure you complete both the federal form and the one for your province).

What if none of those life events apply to me?

If none of those life events apply to you this year, there may be another form you can complete that will reduce how much tax is taken off your paycheque. If you are planning on making an RRSP contribution* in 2015, have childcare expenses, support payments, make a lot of charitable contributions or have any other large expenses that you deduct every year, then you should file a T1213 form with CRA. CRA has to approve your request to reduce your deductions at source, so there is a chance they may say no, but it’s worth a try right?

 

*You need to have a preauthorized RRSP contributions arrangement or provide evidence that the RRSP contribution has already been made otherwise CRA is unlikely to approve the request.


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Isaac Schweigert

Isaac Schweigert

Isaac is a CFA charterholder and is Portfolio Manager and Chief Compliance Officer at ModernAdvisor. He has over 11 years of investment industry experience, including asset allocation, portfolio management, due diligence, compliance and reporting.



  • C. B.-L.

    Why is the government “big, bad”? Are all you financial planners the same?!

    • Navid from ModernAdvisor

      We’re not suggesting that government is big or bad. The point of the article is that if you get a tax refund it means you have paid more than your fair share during the tax year. Many people carry a mortgage or other debt that they pay interest on. With proper planning you can make sure you don’t overpay in taxes and use the additional cash to pay down debt or put more towards savings.