Contrary to popular belief, getting a tax refund isn't really a windfall, says CIBC's Jamie Golombek
TORONTO, May 6, 2015 /CNW/ - A recent CIBC (TSX: CM) (NYSE: CM) poll finds that nearly 60 per cent of Canadians are expecting a tax refund, with almost one out of four planning to use their perceived windfall to pay down debt. Only 13 per cent plan to save or invest the money.
Key findings of the poll include:
- 58 per cent of Canadians expect a tax refund this year
- 21 per cent plan to reduce their high-interest debt by making a credit card or loan payment;
- 19 per cent are either putting it aside or haven't decided what to do with it;
- 18 per cent intend to use their refund to pay for day-to-day expenses, such as bills or groceries; and,
- only 13 per cent plan to save or invest the funds.
"It's good to see that Canadians are committed to paying off their high-interest debt as quickly as possible, but our poll shows that Canadians still aren't putting enough time and effort into tax planning," says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC. "Contrary to popular belief, getting a tax refund isn't really a windfall. After all, what you've essentially done is loan your hard-earned money to the government, interest-free, for a year or more."
Using a refund to pay down debt is consistent with previous CIBC polls that found paying down debt has been the top financial priority for Canadians for five years running, with 85 per cent of Canadians taking steps to reduce their personal debt levels. "When deciding whether to pay off low-interest debt or put your extra funds towards savings, however, a bit more analysis may be needed," says Mr. Golombek.
"A tax refund can have a big impact on either side of an individual's balance sheet, whether the funds are allocated to savings or debt repayment," says Mr. Golombek. "When deciding what to do with your refund, Canadians must review practical considerations, such as current and future anticipated marginal tax rates, rates of return and cost of borrowing before deciding whether it makes sense to save or pay down debt."
For those receiving a tax refund this year, Mr. Golombek provides guidance on how to make the most of any extra money that you have in his report, Mortgages or Margaritas: Is paying down debt putting your retirement at risk?
For the nearly 20 per cent of Canadians expecting a refund but who have no immediate plans for the money, Mr. Golombek urges them to quickly assess their needs and create a financial plan.
Eliminate tax refund by managing taxes throughout the year
While there are a number of ways to use your tax refund to your advantage through paying down debt or saving, Mr. Golombek says that an even better strategy is to ensure that next year, your refund is eliminated altogether.
Mr. Golombek's report Intaxication: Why getting a tax refund may be a sign of poor financial planning urges Canadians to re-evaluate how they think about tax refunds and outlines strategies to better manage taxes throughout the year.
A tax refund typically arises when the amount of tax owing on your return is less than the amount of tax withheld from your income during the year, he says. Employment income is the most common type of income from which tax is deducted at source and, therefore, employees are most often the ones who get significant tax refunds each year.
"If you're an employee, subject to tax withholding at source, and you make regular RRSP contributions, you don't have to wait until next spring for that refund," says Mr. Golombek.
By making RRSP contributions directly from your gross pay, you may immediately reduce the amount of tax withheld from your paycheque, he says. You can also complete the Canada Revenue Agency Form T1213, Request to Reduct Tax Deductions at Source, in which you can list, among other items, RRSP contributions to be deducted from your income when your employer calculates the tax that will be withheld from your pay.
"It's important to consider your financial goals when deciding what to do with your tax refund," says Mr. Golombek. "But it's even better to elimate that tax refund altogther, and use the taxes saved throughout the year to your benefit."
KEY POLL FINDINGS
Percentage of Canadians who expect a 2014 tax refund:
|I don't know||16%|
What Canadians are planning to spend their tax refund on:
|Make a credit card or loan payment||21%|
|Use for day to day expenses (e.g., groceries)||18%|
|Contribute to investment (e.g., RRSP, TFSA)||13%|
|Put towards major household purchases (e.g., appliances)||8%|
|I'm going to splurge a little (e.g., clothes, electronics)*||4%|
|Pay down mortgage*||2%|
|I haven't decided yet / I'm putting it aside||19%|
* Sample sizes are smaller than typically reported and provided only as reference data.
From April 1st to 2nd, 2015, an online survey was conducted among 1,503 randomly selected Canadian adults who are Angus Reid Forum panelists. The margin of error - which measures sampling variability - is +/- 2.53 per cent, 19 times out of 20. The results have been statistically weighted according to education, age, gender and region (and in Quebec language) Census data to ensure a sample representative of the entire adult population of Canada. Discrepancies in or between totals are due to rounding.
CIBC is a leading Canadian-based global financial institution with nearly 11 million personal banking and business clients. Through our three major business units - Retail and Business Banking, Wealth Management and Wholesale Banking - CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada with offices in the United States and around the world. You can find other news releases and information about CIBC in our Media Centre on our corporate website at www.cibc.com.
SOURCE Canadian Imperial Bank of Commerce
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