It’s Tax Time. Are you ready?
Now that the RRSP (Registered Retirement Savings Plan) season is over, Canadians can start preparing their tax returns, which are due to the Canada Revenue Agency (CRA) by April 30, 2016—mark your calendars if you haven’t already! While organizing your return, we recommend making a list to help keep track of the required documents. This is a good way to ensure that you have received everything needed to file your tax return for this year and can assist you in the future.
Once you’ve received all of your documents and filed your taxes, what’s next? Read on for some suggestions on what to do with your refund, or if you owe money to the CRA, how to prevent or reduce what you may owe in the future.
What to do with your tax return
- Pay down outstanding debt: Start by reviewing your debt and pay it down with the highest interest rate first (e.g., credit cards). Paying down debt will not only improve your overall net worth but it will also help reduce any financial stress.
- Build an emergency fund: Financial planners recommend having an emergency fund that would offset, at minimum, three to six months of income. While this may sound like a lot, the cost of having to borrow in the case of an injury or loss of income can be high, and if the time comes, you’ll be thankful for those emergency savings. Plus, the comfort that comes with knowing you have an emergency fund is priceless.
- Open or contribute to a Tax-Free Savings Account (TFSA): The refund you receive from the CRA is tax-free, so using a TFSA as a way of saving/investing is a great option. One of the biggest benefits of a TFSA is that any investment growth earned can be withdrawn tax-free in the future, whereas any growth in an RRSP would be taxed at the time of withdrawal. Note: In 2016, the TFSA limit was reduced from $10,000 to $5,500. It is your responsibility to monitor your contribution room and to determine your individual limit prior to making a contribution.*
- Have fun (within reason): If you’re already planning for the future (retirement and emergency accounts) and you have money left over after expenses, you should enjoy it. Spend wisely though—it isn’t recommended to go into debt for a “want”.
Tips to prevent owing in the future
- Estimate your taxes owed in advance: A financial planner or tax expert can estimate how much tax you should be paying based on your planned income earned in the calendar year. If you realize you are not paying enough taxes, you can ask your employer to increase the amount they withhold from your pay. This may prevent you from having to come up with a lump sum when you file your taxes.
- Start or increase your RRSP contributions: RRSP contributions reduce the amount of tax you owe by providing you with a tax credit. If you have the ability to start making RRSP contributions or to put more money into your savings, you may reduce the amount of tax payable while also saving for your future—a win/win outcome.
- Take advantage of all available tax credits: A financial planner or tax expert can help analyze your personal situation and find all available credits to help reduce your taxes payable.
The information above provides some suggestions on ways you can spend your tax return or prevent owing in the future. With the help of a financial planner/advisor, you can ensure that you setting yourself up for success by receiving a refund, planning for retirement or any other short or medium term goal.
For more information, please contact your Pension Consultant, or the author of this article, Chris Santos, Service Consultant at 1-866-912-6926.