I went for coffee with a couple of friends the other morning, and the conversation revolved around what to do with their tax refunds. Summer clothes, shoes, jewellery, or a holiday were all discussed. I have my choice as well, but I thought it may be timely to talk about the ‘financial choice’ for your tax refund and about tax return ‘surprises’.
First of all, I don’t think you should be getting a tax refund of any consequence; why should the government use your money for free all year? If you are currently investing into an RRSP on a monthly basis, you can ask your employer to deduct less tax per pay—this will increase your monthly cash flow to pay debt or to invest.
A couple of choices other than treating the tax refund as ‘found money’ are:
Invest it. It is never too early to make your 2007 RRSP contribution, or, if you think you may need the funds during the year, keep the money non-registered. If it turns out that the money is not used, the funds can be transferred to an RRSP at that time. This doesn’t mean that you have to keep the funds sitting in a bank account—investments can be transferred ‘in kind’ from non-registered to registered portfolios. Ensure that your advisor knows that you may need the funds within a year so that appropriate options are presented.
Make a lump sum payment on your mortgage. For those of you who ask the question ‘should I invest in an RRSP or pay down my mortgage?’, this is how you can do both.
Pay down your RRSP loan if you have one For those unfortunate to have lost a loved one, there may have been unpleasant surprises with the decedent’s tax return. If the investment was in a RRIF, and the deceased never received their minimum payment for the year, that income may be taxable in the surviving spouse’s hands. Other surprises could include a large tax payable on a family cottage, the estate having to sell some assets in order to pay the tax or the registered portfolio that took a lifetime to build is passed on to children—almost at half the value.
There are ways to preserve the value of the estate for the heirs, but planning in advance is essential.
Some of you may have been surprised with a benefit claw back for 2007. There are ways to mitigate this claw back, and, very possibly, increase your income. Income trusts were very popular investment vehicles for this until the government changed the method of taxation to the holder. (There are many ‘return of capital’ and tax efficient funds available, and I will discuss them in detail in a future article.)
I don’t think that people who have consciously saved and often sacrificed ‘extras’ for years, should lose any government benefits. During my 24+ years in this industry, I have seen people leave large sums accumulating almost no interest in accounts; by choice.
The reasons they give are not wanting to pay more tax (keep in mind that you have to make more in order to pay more), or not wanting to increase their income in order to avoid claw backs. If you had to write a cheque this year and wish you could have the chance to decide what to do with the refund—you may have options. I’ll provide the coffee.