Expert urges clients to work out what they can afford and what offers the best after-tax return
Smart tax planning should result in either a small refund or a minimal amount owing. Alas, real life experiences suggest that is harder said than done.
Now, as significant tax refunds trickle in to people’s bank accounts across the country, the question burns: what should people be considering when deciding how to spend them?
A recent IG Wealth Management study found that 85% of Canadians expected to receive a refund for the 2018 tax year. Of this group, 41% said they planned on using their refund to pay down debt, while 25% planned to spend it.
Of that 41%, 36% planned to pay off households bills or debt, while only 5% opted to put it towards mortgage repayments. Meanwhile, 28% planned to save/invest their refunds into RRSPs, TFSAs or RESPs.
Aurèle Courcelles, assistant vice-president at IG Wealth Management, told WP that paying off the highest interest debt should be the priority. He stressed that while he wasn’t promoting blanket austerity, he said people have to work out where they can get the most bang for their buck.
He said: “Is it to save it, invest it or pay down debt? You have to look at your after-tax rate of return and if you can pay down debt that has a higher interest rate attached to it, especially a credit card where you can get 20% interest.
“[It’s also important to consider] after-tax returns because you have to earn the money, pay the tax to then pay down this interest, which is non-tax deductible. Then it becomes a question of, is my after-tax rate of return on my investments better than the after-tax interests on my debt?
“The difference there is how are you investing your funds? Most debt, the rate fluctuates a little bit, but you are pretty much guaranteed a rate of return. If I’m paying off 4% off my mortgage, I know that’s a guaranteed 4% after tax, so I have to earn so much to pay that off versus investments where there is not that kind of certainty.”
Ultimately, it also boils down to what the individual can afford. If it’s a large refund, it’s possible to split it and put aside a couple of hundred dollars to go to a concert, for example.
Courcelles added: “A lot of people are living a little tighter than others. If you are, is it wise to use that money on a sporting event or a big-screen TV?
“You don’t want to be the killjoy that says you can’t spend any of that money but you have to sit down and look at your budget. Say you get a tax refund of $5,000, if I take $1,000 and go buy that TV, where are we going to put the other $4,000 and is that the best way to use that money?”