The following is an article by Tax Expert, Evelyn Jacks, President of The Knowledge Bureau and author of Master Your Taxes, Make Sure It’s Deductible and Essential Tax Facts. Evelyn is a prolific and bestselling author of over 40 books, a sought-after international speaker and media commentator, known by millions as Canada’s most trusted voice on tax and personal financial matters. Evelyn was recently appointed by federal Finance Minister Jim Flaherty to the Task Force on Financial Literacy, and was previously appointed by the Premier of Manitoba as a Commissioner of the Lower Tax Commission. If you liked this article, sign up for the Knowledge Bureau’s free newsletter containing high quality, current and easy-to-understand information about taxes & personal finances.
Tax Expert - Evelyn Jacks
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So what are you going to do with your tax refund this year? If you are smart you’ll use it to start a savings plan.
Unfortunately, most people do this the wrong way. That is, they use over-deducted tax withholdings as a type of forced savings. This is just not smart. A tax refund really represents an interest-free loan of your hard-earned money to the government.
Much better: resolve to pay only the correct amount of tax by adjusting your tax withholdings or quarterly installments to accurately reflect both your income, your deductions and your available non-refundable tax credits.
Do so by completing both form TD1 Personal Tax Credit Return (federal and provincial), and Form T1213, Request to Reduce Tax Deductions at Source.
That’s the first lesson in Basic Tax 101! Now, let’s move on. Here are six tax efficient ideas for “leveraging up” your tax refund and building wealth over the long run. Use your tax refund to:
1. Pay off expensive, non-deductible debt, like credit card balances. (Then vow to budget and live within your means, saving first, before spending.)
2. Invest within a TFSA—that’s the new Tax Free Savings Account. It’s a great place to park money and earn tax free investment income. But you must file a tax return to build the TFSA contribution room, and be at least 18.
3. Invest in an RRSP, if you have taxable income. You will reap immediate tax savings in the double-digits, money you can then use for a TFSA contribution.
4. Invest in an RESP, if you have children—that’s a Registered Education Savings Plan. The government will add to it too, in the form of the Canada Education Savings Grant, and for low earners, the Canada Learning Bond.
5. Invest in an RDSP—a Registered Disability Savings Plan—if you have a disabled dependant, and benefit from the government grant and bond structures available here, too.
6. Invest in your non-registered investment accounts, with a view to earning tax efficient income like dividends and capital gains.
There are many other options, like paying down your mortgage, for example, and investing in a new home, or a life insurance policy, which contribute to your potential to receive tax free dollars.
However, if you must, buy the Apple iPad or take the vacation with your tax refund, think about this as you do it: the trick to mastering your money is to take control of the first dollar you earn, hold on to it the longest through wise investment choices, and then, pass along the most to yourself in your retirement and your heirs at death.
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