Strategies for lowering taxable income can keep more money in your pocket throughout the year, says CIBC's Jamie Golombek in a new report
TORONTO, April 4, 2019 /CNW/ - Can't wait for your tax refund? You're not alone. A new CIBC poll finds that more than half (53 per cent) of Canadians have already received or expect to get some money back for the 2018 tax year. Most will use the extra cash to pay bills, credit cards or loans. But a tax refund isn't the "windfall" Canadians believe it is, says tax expert Jamie Golombek, rather it's a sign 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. "Now is the perfect time to talk to a financial advisor about how to make the best use of your 2018 refund to meet your goals – and plan not to get a refund next year."
For example, one strategy Mr. Golombek suggests is to reduce your taxes on every paycheque, instead of waiting until your return is filed the following spring to get a refund. By completing Canada Revenue Agency's one-page form, T1213 "Request to Reduce Tax Deductions at Source" you can indicate various deductions or credits that, if not taken into account, would otherwise result in a tax refund for the year. Examples include contributions to RRSPs or childcare expenses.
Key poll findings:
- More than half (53 per cent) of Canadians expect a tax refund for the 2018 tax year
- 63 per cent view their tax refund as a "windfall of unexpected money" to put towards their goals
- Most will use the money to either pay down balances on credit cards and loans (20 per cent) or cover everyday expenses (20 per cent), rather than invest (12 per cent); 22 per cent don't know what to do with it
- 39 per cent have "no idea" what their tax situation will be until they've reviewed their paperwork with an expert
How your investment income impacts your tax bill
Canadians use various investments to help grow their money, but many are in the dark about the implications on their tax bill. In fact, the majority of those Canadians don't know that all non-registered investments aren't taxed the same way (76 per cent), or that all investment income isn't taxed at their full marginal rate (80 per cent). More than half (51 per cent) don't realize that they're required to even pay tax on the interest income they earn in an everyday savings account.
"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 Mr. Golombek and Debbie Pearl-Weinberg, Executive Director, Tax & Estate Planning, CIBC in a new report A Portfolio Less Taxing: Understanding the Taxation of Investment Income and accompanying video. "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."
For example, 77 per cent 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. Similarly, capital gains are only 50 per cent taxed, effectively cutting whatever tax rate applies in half, and are only taxed when the investment is sold. This is in contrast to interest from sources such as a bank account or GIC or foreign dividends, which is taxed annually at your full marginal tax rate.
The timing of buying or selling investments can also impact your tax bill, notes the report. For example the case of capital gains, postponing a sale of an investment to January of the following calendar year, rather than selling late in the year, may defer the tax for an additional year. Moreover, if you have a net capital loss, it can either be carried back to offset gains in the prior three years or carried forward for use in any future year.
When asked about taxation of Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA), Canadians fared a bit better. 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 knew (53 per cent) 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," says Mr. Golombek.
In addition, if you're borrowing to invest or you're paying fees to have your non-registered portfolio professionally managed, you may also be able to claim expenses to further reduce your taxes payable, he adds.
More information about the taxation of investment income, including foreign income, real estate investments and income splitting using prescribed rate loans, along with the deductibility of investment expenses can be found in the report.
About the 2019 Tax Refund poll: From March 22nd to March 24th 2019 an online survey of 1,516 randomly selected Canadian adults who are Maru Voice Canada panelists was executed by Maru/Blue. For comparison purposes, a probability sample of this size has an estimated margin of error (which measures sampling variability) of +/- 2.5%, 19 times out of 20. The results have been weighted by education, age, gender and region (and in Quebec, language) to match the population, according to Census data. This is to ensure the sample is representative of the entire adult population of Canada. Discrepancies in or between totals are due to rounding.
CIBC is a leading North American financial institution with 10 million personal banking, business, public sector and institutional clients. Across Personal and Small Business Banking, Commercial Banking and Wealth Management, and Capital Markets businesses, CIBC offers a full range of advice, solutions and services through its leading digital banking network, and locations across Canada, in the United States and around the world. Ongoing news releases and more information about CIBC can be found at www.cibc.com/ca/media-centre or by following on LinkedIn (www.linkedin.com/company/cibc), Twitter @CIBC, Facebook (www.facebook.com/CIBC) and Instagram @CIBCNow.