Is the tax
refund a good thing? It’s a question that spurred a great debate in February’s
Knowledge Bureau poll when we asked tax and financial professionals whether or
not the withholding taxes that lead to a tax refund should be reduced to help taxpayers
save or pay down debt. Did the no side or the yes side win? You’ll be surprised
by the results.
While the
votes were split almost down the middle (58% no, 42% yes, from a total of 266
votes), the comments revealed that most agree about one fundamental concept: having
taxpayers receive such large refunds means that the government is getting
significant interest-free loans from taxpayers, and that’s not ideal.
The debate
itself came down to a behavioral finance factor: taxpayers look forward to
these returns and factor them into their financial planning each year, whether
it’s the most strategic approach or not. So, reducing CRA tax withholdings means
that many advisors have to re-align their clients’ way of thinking and their
approach to money management – and they were divided on whether or not that could
be effective.
Read on for more insight from February’s poll, starting
with some comments from respondents who voted “no”:
Cindy
outlined why having the extra cash flow monthly might be ineffective: “I
wish I could say yes, but a lot of Canadians are not responsible enough to use
the extra monthly cash in a beneficial way.”
Clare gave a succinct summary of why this is
such a highly-debated issue: “Most prefer to have the refund, it has
turned into a short-term savings account. Maybe we should encourage the CRA
to pay interest on the refund. It would push the CRA to reduce the amount
of taxes taken as they won’t want to pay interest, but recognize the amount as
a true short-term savings account for the taxpayer.”
Joanne agreed, explaining that she’s tried to
re-align her clients’ perceptions about the tax refund: “In spite of advice to the contrary, many clients still want the
refund at the end of the year. Their idea of a reward at tax time or
forced savings. I do, however, explain their options and the reasons.”
Mitzi-Lynne
used an important example to highlight why she voted no:
“I thought about this and I don’t think
it would help, except in very rare cases. My clients all want that refund at
tax filing time. If the deductions were used to reduce taxes
paycheque by paycheque, the bills would still pile up, the bit extra on the
paycheque would be spent on trivialities, nothing would get saved and at the
end of the year there would be zero refund. Typically, my clients claim the
Northern Resident Deduction. They could get this benefit paycheque by paycheque
by putting it on the TD1, but they kick up dust at tax time because don’t understand
that they already had that benefit, (and wasted it!) and you only get it once. I think that reducing the tax
payments over the year would not benefit many people. It may be better that we try
to do a bit towards saving them from themselves.”
Daniel
stated that there could be repercussions if the government stops withholding
too much tax: “I think the tax refund scenario is a
win-win for everyone. The government gets the free use of our money for
part of a year, and we get a forced savings with a lump-sum payout at the end
of the year. If not withheld from paycheques, many taxpayers would spend it all
as soon as they receive it anyway. And if the government didn’t get the free
use of our money throughout the year, they would instead need to raise the tax
rates. Would we like that any better?”
Frank
said: “While a lesser refund would totally
make sense, since it is the taxpayer’s money the government is working with,
many people would not really benefit from it. Many taxpayers wait for that cash
tax refund to make a purchase or go on vacation. All of these taxpayers who expect
that refund would not save a dime during the year. Without this little bright
light of the refund, they may not ever make their purchase, take their vacation,
or worse, pay down debt.”
Tim
explained how it may depend on the circumstances: “I would like to know
what deductions and/or credits are being claimed to generate the $1,700
refund. Is this a one-time RRSP purchase in February? If so, the CRA had
use of the refund for only about two months. Even if it was monthly
contributions out of your bank account and not through work, average it out
over the year and, really, how much interest are you losing? Is it from a
year-end charitable donation? Again, not really much interest lost. If it’s a
disability credit claim for a dependent or spouse, then, yes, the TD1 should be
filled out and given to your employer to reduce tax withholdings.”
Alice
pointed out that reducing withholdings risks that taxpayers will owe:
“I would hesitate to recommend lowering withholding taxes, as it may create
owing tax at the end of the year and this is very hard for taxpayers to deal
with. I always find there are employees who ask to have more tax taken off each
paycheque.”
Jo agreed: “I would
hesitate to recommend lowering withholding, as I have worked with too many
clients who depend on the ‘Rev Can savings plan’ and for whom actually owing
would be a disaster. Indeed, when doing payroll, I always find there are
employees who ask to have more tax taken off each paycheque. It is easy to look
at this $1,700-plus as a ‘wasted’ opportunity but — especially for those taxpayers who don’t have that much
discretionary income — this is the
best way for a lot of people to accumulate some savings.”
Gaetan stated: “In my 35+ years as a tax accountant, the vast majority of my
clients (90%+) want to see a refund from their tax return filing. The
reason for this is that they see the refund as a tax-free “bonus” part of their
income. They do not see it as paying too much in income taxes. Many of my
clients actually rely on a tax refund to finance their vacations, home
renovations, etc. If their tax deductions are reduced at source (from their
paycheques), their standard of spending will simply increase accordingly. They
see their refund as a type of ‘forced’ savings tool. Even after I explain to my
clients that this means the government had their hard-earned money for more than
12 months, interest-free. My clients simply want a refund every year!”
Here
are some comments from those who voted “yes” – which weren’t that different
from many of the “no’s,” demonstrating why this is such a complex issue to
debate.
Leanor
indicated how addressing this issue with business clients opens up a whole
different conversation: “You are all looking at the individual
taxpayer, but what about the business taxpayer, who pays monthly corporate tax on
the basis of the profit of the previous year end—business becomes slow so very
little profit, but you have paid monthly to the CRA. Try getting that back
in a timely period after you have filed your year-end—you will no doubt expect
an audit as they hate to give up money paid in two years ago. Expect an audit
which is very time consuming and a great expense to the business owner. CRA
would give you penalties back to each month’s corporate tax bill if it wasn’t
correct by their auditors.”
Ron
explained that from a professional standpoint it makes sense, but he is
concerned about the impact it would have on taxpayers:
“Yes I think withholdings should be reduced, but there are just so many folks
out there that use their tax refund as their savings account! And they will be
happy with a big refund rather than the smaller amounts they would get each
month, which would then just get spent! Many treat that refund much more
wisely than they would with an extra few dollars on their paycheques!”
Prith
said “yes,” but added that the CRA needs to introduce a more comprehensive
assessment: “We need comprehensive assessment, it
would make more sense. Then, the people who know they have high medical
could use those to bring down their withholding.”
Doris agreed: “There
are things that bring down your tax over and above the items listed on the TD1.
If that was more comprehensive, it would make more sense. Then the people
who consistently tithe, or know they have high medical, could use those to
bring down their withholding.”
Pat said it would help seniors, in particular: “I suggest to seniors who get a refund that they should reduce
it. Better to have the money monthly. I usually tell them it is
better they get to spend their money than their heirs. Also, in BC, after the
age of 55 we can defer our property taxes. It really helps!”
Heather
pointed out how reducing withholdings demands professional advice:
“Advisors, both tax and planners, should be working with their clients to
update the TD1 each year. Another value-add that gets missed too often.”
Martin
outlined the challenges, and offered a solution: “Yes,
withholding should be reduced a little. It’s a free loan to the
government. Having said that, however, many taxpayers would not reduce debt or
save it, but consider it just more cash in their pocket to be spent. They just
wouldn’t have to wait until the following April to receive it. A person can
already ‘reduce tax deductions at source,’ if they make arrangements to make
contributions to an RRSP and have their employer fill out the form. That
way, it is a forced savings.”
Thank you to everyone who weighed in on
February’s highly-debated poll question! This month, we’re changing gears and
asking: “In your opinion, is it as difficult to
envision life after retirement as it is to save for it?” Vote now!