How Will You Spend Your $1765 Tax Refund?

It’s tax time. Call me a dork, but I love tax time. For some 17 million Canadians, tax time means a big tax refund. In fact, according to the Canadian government, that many tax returns last year resulted in a combined $30 billion of refunds. That’s $1765 on average.

So are what you gonna spend all that free money on?

Before we go there, please allow me to put this into perspective. There were about 29 million tax returns filed in 2017. Of these, just over half (17 million) received refunds. The rest were nil returns or had tax owing. If you add it all up and crunch the numbers, you’ll see that the average tax return actually owed $242. But today’s post is specifically for those 17 million of you who are looking forward to a refund, not a balance owing. (Ok, maybe that’s a bit presumptuous of me to expect that you’re all reading this…)

There is one very important point to consider in all of this: that $1765 is not free money.

Then Whose Money Is It?

That juicy tax refund is actually your own money coming back to you.

Throughout the year you are required to pay the government its share of your income tax as you go along. If you’re an employee, then your employer just takes it right off your paycheque and sends it to the CRA (Canada Revenue Agency). If you’re self-employed, you are required to pay the CRA in installments.

When tax time comes along, a refund or balance owing is literally just squaring up with the government. If you didn’t pay enough through the year, you owe more now. If you overpaid through the year, the governments owes you now.

In other words, if you’re getting a tax refund, the CRA is literally just paying back the interest free loan that you gave them.

How Can I Turn That Around?

From a pure mathematical perspective, it makes the most sense to not pay the government anything until tax time and then give them one massive cheque for your entire year’s worth of taxes. That way they would have lent you the money interest free.

Except they don’t like that.

You can maybe get away with that for a year or two at most, but pretty soon the CRA will demand that you start to pay in installments. There are equations and such that you can read up on that spell it all out, but that’s not the purpose of today’s post.

So the next best thing mathematically that you can actually do year after year is to aim for zero tax refund or balance owing. And about 6 million Canadians are doing that successfully. There is even a government form that you can fill out each year to help you achieve this.

But again, that’s not the point of today’s post. I’m only going through that to show you that your “free” $1765 tax refund is not really free at all. You worked hard for it, and it’s already yours; you just loaned it to Uncle Sam’s neighbour to the north for several months.

Be Deliberate and Don’t Blow It

Buzz Kill Chris says don’t blow that $1765. Save it, invest it, or pay off debt. You could even channel it into an RESP for your kids and score an extra truly free 20% contribution from the government.

What if you had an extra $150 or so per month instead of one big $1765 payment? Would you be disciplined enough to save it up so that you could splurge on something big and fancy? For most people, the answer is probably not. But that’s what you should do instead. If you want something big and expensive, then budget for it along the way. Train your saving muscle. Don’t rely on the government to do it for you.

But I still think you should save it, invest it, or use it to pay off debt. That’s my personal opinion, and I know others will differ. So I’m not going to try to convince you that if you invest that refund every year at 13% interest you will have $12 gazillion by the time your great-great-grandkids are having great-great-grandkids of their own. Put another way, if you invest your refund, you are actually using that returned money to buy your future freedom!

Use your returned money to buy more future freedom!

A More Balanced Approach

Ok, so we’ve established that it’s not free money, but that it’s just your own money coming back to you. And we’ve established that Chris wants you to buy future freedom with it. But there is another good option, too: Take a balanced approach.

There’s nothing wrong with a little treat if it’s measured, deliberate and planned out. (And if you’re not burning in a debt emergency.) Also, don’t forget to share the love! Give some away to your favourite charity or non-profit organization of choice. And then save or invest the bulk of it.

Really, the bottom line is that you need to make a deliberate choice. We are stewards of our money. Don’t just say, “Well, it’s free money that I didn’t have yesterday, so let’s treat myself!” Control your money and tell it where to go. Make good decisions and bring the best value to your life overall, balancing between the You-Only-Live-Once internal voice and the Don’t-Outlive-Your-Money internal voice.

Your Turn Now!

Are you getting a tax refund this year? What did you do last year? What will you do this year? If it’s a big refund, will you submit a request to the CRA for lower future withholding taxes?