Tax Refunds Cost You Money

Around this time of year, most people look forward to a nice big tax refund cheque from the CRA. The average refund for 2007 was $1440, a pretty substantial amount. Plenty of people (including financial advisors) will suggest treating yourself to something nice. $1440 will buy you a pretty nice TV, for example. But let's think about where that money came from first.

The government is not giving you free money. It's actually returning your money. Money that you overpaid through the year. In fact, because you overpaid, you've given the government a free loan and you didn't even get to earn any interest on it. So getting a big refund is actually to the government's advantage, because they certainly are getting a better-than-zero return on the cash you've graciously lent them.

One argument in defense of tax refunds is that they are like a forced savings, taking money out of your hands that you might otherwise have spent. Well, if you need to be on a forced savings plan, why not set one up yourself that sends regular deposits from your chequing account over to a high interest savings account or a money market fund. At least that way the money is working for YOU, and is way more liquid (should you really need it) than waiting for a cheque once a year.

It's probably to your advantage to actually owe a little bit on your tax return. However, you will need to budget for the amount owing at tax time. In the end, though, the fairest result would be to have no refund and no amount owing.

If you find yourself regularly getting a large refund, you can fill out form T1213 to request to have tax deductions reduced.

So if you get a refund this year, before you go and spend it, remember that it's not free money, and it's not a bonus. It's cash that you should have had in your hands already. Cash that you should have been able to put to work for yourself. Use the money like it was already yours, except that it was put away in an account earning you 0% and locked up until a few weeks after you file your return.