Is It Wrong To Get A Tax Refund?

Tax ReturnIt’s March, which can only mean one thing. All the green beer you could ever want to drink!!!

Or not.

It’s also the time of year many Canadians will begrudgingly start working on their taxes. If you’re anything like me, tax time is a myriad of forms, paperwork, and other tedium I really should have gotten around to in October. But here we are.

For most of you reading this, tax time isn’t so bad. Chances are you only have income from one source (your job), or maybe another source like a side hustle or investment returns. Add on a slip for your RRSP contribution, and that’s about it. Spend an hour on Turbotax and you’re done.

The average Canadian also overpays during the year — by design, since the last thing the government wants is to have to hound everyone for taxes at the end of the year — to the tune of more than $1,000, a pretty big chunk of change.

For years, the same advice has been given to taxpayers. Instead of getting a fat refund at the end of the year, you should opt for less tax taken off at the source and enjoy that money year round. If your refund is $1,200, wouldn’t you much rather have $100 extra per month? After all, there’s value in having money now compared to a year from now.

While that’s true, I’m of the belief that, for most people, it doesn’t really matter. Here’s why it’s okay to have a tax refund.

Pros aren’t really pros

Think of it this way. For the sake of simplicity, let’s divide people into two groups, even though real life doesn’t work that way. We’ll call them the financial studs and duds. The studs are maxing out retirement accounts, living frugally, and so on. The duds are doing everything wrong.

Let’s assume both groups get a tax refund each year. The studs do smart things with it, while the duds spend it on green beer and other silly things. Would that really change if each group of people had the tax refund to spend in equal increments over the year? I’m guessing not.

In fact, I’d even argue that the duds of the world are more likely to do something smart with the cash if it all comes in one big lump sum. There’s a huge psychological benefit to paying off a quarter or a third of your credit card at once, while many people wouldn’t even bother throwing $100 per month extra at it because it doesn’t feel like they’re doing anything.

The other anti-tax refund argument is that having the cash now is more valuable than having it later. For the most part, this is true. In theory, you could invest that cash for a few months and end up with gains.

But in reality, putting $100 per month in the bank at 1% interest gives you a whole $6 extra per year compared to the person who gets it all back at the end of the year, since you’d slowly be depositing it over the year. You’ll forgive me if I don’t get excited over that. You could make gains higher than that in the stock market, but those are hardly guaranteed.

But saying all that, I am in favor of you getting rid of your tax refund. Just not in the way you’ve been taught.

A better plan than getting a tax refund

There’s a really easy way for you to minimize your tax refund in 2015. All you have to do is earn more money.

I’m not talking about getting a raise at work, although that’s not a bad idea either. Instead, leverage your skills into a profitable side hustle. You’ll make income that isn’t taxed at the source, which will eat up your tax refund. Just be sure to figure out the tax implications of your side income so you’re not running into a different tax problem — being short.

There are other advantages to having a side hustle. You can write off part of your house as a home office, and chances are you can write off anything from a portion of your vehicle expenses or internet as well, depending on the nature of your business. You’ll make extra cash and cut down on your expenses.

There are hundreds of reasons why having a side hustle is a good idea. Using it to avoid getting a huge tax refund is just icing on the cake.

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Preparing to File Your Taxes in Canada

It’s tax time! Hopefully, you’re getting ready to file your taxes, awaiting your tax package from the Canadian Revenue Agency and organizing your supporting documentation. You should receive your tax package, based on the province or territory in which you resided on December 31, sometime in January.

Each CRA tax package should contain the following:

  1. Your tax return form
  2. Your federal tax worksheet
  3. The forms for any schedules you require
  4. Provincial or territory tax worksheet
  5. Information guide

If you don’t have a tax package by the end of January, or if you have the wrong one (the CRA will usually just send you a package based on the way you file your taxes the previous year), you should make an effort to get your hands on one. You can download and print the right package for you from the CRA web site, request a mailed package using the Internet, order a tax package by calling 1-800-959-2221, or go to a postal outlet or Service Canada office and pick up a package in person.

Keep an Eye Out for Tax Slips from Others

As the end of February approaches, you should receive slips with tax information. Employers, payers, plan administrators and others will be sending you relevant information (it will go to the CRA as well). Your T4 slips include information about your income, pension plans, old age security income, benefits, insurance and other income. You might also receive T3 slips providing information about trust income that you need to file your taxes.

When you receive this information, keep it together, and somewhere safe. Set up a folder so that you know right where this information is, and so that it is easily accessible as you prepare your taxes. Understand which slips belong with which returns (you might need a separate return if you have a business), and organize your slips as they come in. Also, be aware of the organizations and people that might be sending slips. If an expected slip doesn’t come in, contact someone to find out where the slip is.

Organizing Your Paperwork to File Your Taxes

While you wait for your slips to come in, it might be a good idea to organize what paperwork you can. Collect relevant receipts and other documentation that you need in order to qualify for tax deductions and tax credits. Without documentation, you might be unable to reduce your tax liability. Keep documentation for tax breaks together, and when your slips come in, place them with the appropriate documentation. That way, the process of filing your taxes will go smoother.

Even if you have someone else prepare your taxes, you should try to organize your paperwork as much as you can. Call ahead of time to make an appointment so that you can get in, and ask what you need to bring to your appointment. Many accountants can provide you with a checklist of what to bring to your appointment when you file your taxes. Even if you don’t use an accountant to prepare your taxes, you can still ask for a checklist. The CRA also has a helpful checklist of items that you need for your tax return.

Start now, and prepare a little bit at a time, and you will be ready to properly file your taxes when the time comes — with as little fuss as possible.

Any other suggestions for when you file your taxes?