Before I get into my annual lecture about making maximum use of your income tax refund, let me relay some interesting trivia and factoids about income taxes in Canada.
These are courtesy of CRA, Statistics Canada, CBC and the Knowledge Bureau, form the 2012 tax year.
Something like 17 million taxpayers will receive refunds this year, with the average over $1,600. That’s an amount that is worth investing, using to reduce debts, or otherwise putting to good use. More on that in about 93 seconds.
CRA collects some $120 billion in personal income taxes from the 25.5 million people who file. (And remember, even though you got a refund, you probably still paid income taxes.)
The top 1% of income earners (254,700 people) paid 21% of the total taxes collected, though the top 1% accounts for just 11% of total personal income. This suggests that the progressive tax system works. Let me explain.
The top 1% pay much of their income taxes at the top rate, between 43% and 50% in all provinces but Alberta. Their median income was $283,400 and their median taxes paid were $90,100, for an overall tax rate of about 32%.
For the 99% of the rest of us, the median tax paid was $1,800, with an overall tax rate of 6.3%. (Averages are different than median. Median means half were above this, and half below.)
The big difference is that the median income for the 99% was $28,400, with half of filers above that, and half below.
On the donation front, $8.3 billion was donated to charity, with an average claim of $1,437. We know that the average is higher in Manitoba, home of the most generous contributors.
Now, let's talk about that refund, remembering that this was an interest-free loan from you to the government.
First tackle any high interest debts, like credit card balances. Rates of 18% or higher can still be found, and making only minimum payments on such balances takes 20-30 years to pay off.
Make any such debts your first priority.
Next choice is loans on which you are paying interest well above the expected rate of return on investments. By this, I mean loans at 6% to 8% or higher. These are best paid off, generally,
When you get to loans with interest rates close to prime, or mortgages in the range of 3% or 4%, RRSP contributions may become very attractive, if your taxable income is above, say, $35,000.
Above that, each $1,000 contributed to an RRSP will save you $270 to $460 in taxes when you file next year's tax return. It will also put that money to work now in the form of an investment.
If you have kids, another way to get more money back from the government is to make a contribution to an RESP. The first $2,500 per year contributed per eligible child will result in a 20% government grant into the RESP, added to the money growing to pay for future education expenses.
If you’re in great financial shape, then consider using some of that refund for a splurge, like next year's winter vacation. (But you probably already thought of that, didn’t you?)
People who get large refunds (in the absence of things like tuition or large donation receipts) should consider taking steps to pay the government less through the year, either by decreasing paycheque withholdings (CRA form T1213) or by making smaller quarterly installments.
That way, you can put your money to work for you throughout the year, or to pay for things like fees for water pipe thawing and car suspension repairs. J
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, advisor and Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.