Tax refunds are great…but wrong says CIBC

Poll reveals gaps in Canadians’ knowledge of tax regime

Tax refunds are great…but wrong says CIBC
Steve Randall

Who doesn’t love a tax refund? With millions of Canadians having already received one or expecting to, a spring windfall is always welcome and frequently used for something special or to pay debts and bills.

But CIBC’s tax expert says that, much as we love getting something back from the government, a tax refund is the result of poor financial planning.

"Canadians love their tax refunds and 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," says Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC.

Golombek says that now is the time that Canadians should be talking with a financial advisor to make the best use of their refund and plan for a more tax-efficient future.

How Canadians use their refunds
A new CIBC poll finds that 53% of Canadians have already received a refund this year or are expecting to with 63% seeing it as a windfall of unexpected money to put towards goals.

Most will use the cash to reduce credit card or loan balances (20%) or cover everyday expenses (20%). Just 12% invest the money.

And four in 10 Canadians don’t know what their tax situation will be until they’ve reviewed it with an advisor.

Unsure of tax on investments
The poll also shows a lack of understanding about how investments affect an individual’s tax bill.

Most (76%) don't know that all non-registered investments aren't taxed the same way or that all investment income isn't taxed at their full marginal rate (80%). More than half don't realize that they're required to pay tax on the interest income they earn in an everyday savings account.

More than three quarters of respondents don'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.

They are also unaware that only 50% of capital gains are taxed and only when the investment is sold. The timing of any sale of investments can also impact the tax bill.

"Various types of investment income are taxed differently, so your choice of investments can greatly impact your after-tax return on a particular investment," says Golombek "If you're not paying attention to how your investment income is taxed you could be missing out on better after-tax returns – and, your investment earnings could tip you into a higher marginal tax bracket."

Better knowledge of retirement funds
Canadians are savvier when asked about taxation of RRSPs and TFSAs.

Most (70 per cent) knew that they don't pay any tax on income earned in an RRSP until it's withdrawn from the plan, though fewer (53%) knew that income earned in a TFSA is completely tax-free when the rules for these plans are followed.

"Investing in either a TFSA or tax-deferred RRSP is a great first step but take the time to review your entire portfolio with a tax advisor to ensure you're not overlooking ways to optimize your earnings and lower your tax bill with more informed investment choices," urges Golombek.