Now that most of us have filed our personal income tax returns, many of us are waiting for our tax refunds from CRA. Last year, close to 60% of tax filers received refunds.
Are tax refunds good or bad?
A tax refund is a sign that you paid through your employer more income tax during the year (or remitted more tax installments, in the case of self-employed people), than what you are supposed to. It’s like giving CRA an interest-free loan.
Many people don’t realize that he or she can request his or her employer to reduce the tax withheld on salary, by completing the TD1 forms (federal and province). Income taxes at source can be adjusted based on the amount of personal credits the client will claim on his or her tax return.
Receiving a tax refund provides some instant satisfaction – for many people, it’s extra money – a cash windfall – to spend, to invest or to pay a loan.
But, had you received that extra money throughout the past year, rather than waiting for the refund this year, you could have invested it (and earned some income) or used it to pay down a loan or a credit card (and saved on interest expense).
However, there is a danger that the extra money you received in small amounts during the year could have been spent on frivolous items.
The financial benefits of reducing the income taxes on your paycheque versus receiving a refund will be impacted by how you intend to use the funds. If you plan to spend the money or use it for short-term savings, there is very little benefit to receiving the extra money with each paycheque.
However, if you have a long-term investment or a debt repayment goal, the benefits of receiving the money throughout the year can outweigh the lump sum refund.
[Disclaimer: Readers are cautioned that this article may not be appropriate for their purposes, as each individual or company have a different tax circumstance. Please contact our office for evaluation of your specific tax or financial situation.]