Canadians love their tax refunds, but it's blinding them to better tax planning: CIBC poll

A new survey by CIBC found that 63 per cent of participants didn't know tax refunds were their own money, rather than a 'windfall of unexpected money.

Most Canadians can agree that there is no better feeling than checking your bank account and seeing that your tax refund has been deposited.

While a new poll by CIBC found that 53 per cent of Canadians are expecting to get some sort of refund this year, Jamie Golombek, the managing director of tax and estate planning at the bank, doesn’t think refunds are worth celebrating.

Rather, he thinks it’s a sign of poor financial planning.

“Canadians love their tax refunds and at this time of year many people are filled with ‘intaxication’ — a term I use to describe the short-term euphoria of getting a tax refund that fades when you realize you’re getting your own money back,” Golombeck said in a release accompanying the poll. “A better plan is to ensure your portfolio operates as tax-efficiently as possible to keep more of your money throughout the year.”

The CIBC poll surveyed 1,516 randomly selected Canadian adults who are Maru Voice Canada panellists. It found that 63 per cent believed that their tax refund was a “windfall of unexpected money” they could use towards paying something off or putting in savings. 

CIBC has also put out a report breaking down how different types of investment incomes are taxed.

The report is meant to be a reference tool to help people better understand the taxation of investments, so that when they make decisions on how to invest going forward they can minimize the amount of tax paid over a lifetime, Golombek said.

The trouble is, many Canadians don’t know where to start when it comes to reducing taxes on their income, let alone investment portfolios. Golombek thinks a lack of financial literacy amongst Canadians is the cause.

He said an easy way for Canadians to start taking control of how much tax they pay is to fill out a T1213 “Request to Reduce Tax Deductions at Source” form from the Canadian Revenue Agency. This will reduce how much tax is withheld from each paycheque, allowing individuals to allocate it to RRSPs or childcare when they are paid, instead of waiting for a refund.

The poll also found that many Canadians  don’t know how taxes work on investments.

For example, 51 per cent of respondents didn’t realize that they’re required to pay tax on the interest income they earn in an everyday savings account.

“I thought that everyone knew you had to report all your income on your tax return, including employment income as well as investment income,” Golombek said. “That does include minimal amounts of interest income you earn in your savings account at the bank including GICs.”

Capital gains and dividends are the two other kinds of investment income that are relatively common for Canadians.

When it comes to capital gains, only 50 per cent of what is earned is taxable.

“This is advantageous to someone investing in individual stocks or perhaps through a mutual fund, that can either earn capital gain through its own investment or when you sell the mutual fund,” Golombek said.

With dividends from a publicly listed Canadian company, a Canadian investor is eligible for a tax credit which will reduce the overall tax rate on the income.

The report also looks at real estate investments, foreign income and income splitting.