How to accelerate your savings during tax season in Canada

Hey, before we get into this episode,

I just quickly wanted to say thank you so much

to all of you who have listened to the podcast this year

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will build a retirement plan for you and your family.

So far, this has been our busiest year by far

and we are already booking some new plans into July and August.

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so I wanted to put it out here on the podcast

where we have two open spots for April,

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We found that that's exactly who we can do our best work for

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Our planning and investing services are separate

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and you're hoping to retire in the next 10 years or less,

you are a perfect fit for a Cedar Point Pathway.

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Take care.

Tax season doesn't have to just be about filing paperwork.

It can actually be one of the best opportunities

all year to move your financial plan forward.

So today we're breaking down how to think about your taxes

the right way and how to use that refund

to accelerate your savings instead of letting it slip away.

Thanks so much for joining us today

and enjoy this episode of the Canadian Money Roadmap Podcast.

All right Sam, tax season is here.

So this episode we're gonna get into a few things

to consider when it comes to filing your taxes.

And yeah, hopefully put you on the straight narrow

with the tax man before he shows up.

That's exactly right Evan.

And I know some people may have already kind of gone

through some of their tax process to this point,

filed already and things like that.

But better late than never.

And I think some of the things we'll bring up today

are relevant for this year, next year,

and going forward.

So we'll kind of talk about some things

that are relevant to filing this year,

but also kind of a broader financial planning

look at taxes in general.

Okay, first things first.

Here's a bugaboo of mine.

This is a segment we don't have a jingle for yet,

but we're gonna call it talk like an investor.

We were thinking of something along the lines

of like the bangles, walk like an Egyptian,

act like an investor, something like that.

So anyways, without that, you can use your imagination.

But the first thing, when we're thinking

about filing taxes and getting some money back,

there are two R words that are often used either

interchangeably or incorrectly.

Often times when people get money back,

they call that a tax return.

Thinking that taxes are being returned to you.

This is not an illogical assumption,

but that is not what a tax return is.

So a little bit of language clarification

at the get go here.

When you compile all of your tax slips

and put together your deductions and your credits

and all that and you send it to the Canada Revenue Agency,

a CRA, that is called your tax return.

That process is your tax return.

Then if you happen to have overpaid on your taxes

based on your personal circumstances

and a CRA owes you some money back based on that filing,

that is called a refund, not a tax return.

So return and refund.

This is some critical information here.

Drives me bananas when I hear the opposite,

but it's also completely logical.

So that is my bugaboo to deal with on my own.

But hopefully we're on the same page now.

Good clarification to start with.

And yeah, the terminology used is the confusing part,

but good to get that clarification.

So we're kind of on the same page

of what we're talking about

because as we kind of get into taxes a bit more,

there's increasingly technical aspects.

So to have the terminology clarified up front

can help inform the rest of the conversation.

A return is not a return to you personally.

It is a return of your tax information

to the government of Canada.

That's right.

Speaking of government of Canada,

what are we even doing with these taxes here Sam?

Sam, you are a very recent PhD in economic history

here in Canada in two minutes.

10 seconds, and then we can maybe recommend a book.

But so if we go to the historian corner, income tax.

Well, tax has been a part of life in Canada

since the nation was formed,

since Confederation in 1867.

But it wasn't tax as we think about it today

as far as income tax.

And that only gets put in due to the costs of the First World War.

So it's a temporary income tax act

to help fund the Canadian involvement in the First World War.

And then that just gets continued on.

The government said, you know what,

having a bit more cash around, not the worst thing.

And then there was some lingering costs associated

with debts from the war and things like that.

So it stayed in place after the First World War finished in 1918.

And if you want to learn about tax and governance

in Canada prior to this,

Ellsworth, he made has a great book called Tax Order

in Good Government that talks about the importance of tax

and Canadian history from 1867 onwards.

So I enjoyed that book immensely, very interesting,

but definitely deals with the subject of tax.

It sounds like exactly what everybody here is going to scramble

and, you know, get that B-Tread going.

Absolutely.

And page turner.

Awesome.

Sam, that's always fun.

I like to hear the background of stuff

and the historical perspective is always valuable.

So why are we filing taxes here in the first place?

Like, what is the benefit?

Well, it is an obligation that you are required to do it.

And Canada revenue agency is an enemy that you do not want.

This is a kind of an unrelated piece of anecdotal evidence

there.

You remember Al Capone, Sam, speaking of historical context?

I sure do.

Gun runner, you know, bootleger, you know,

all the classic criminal activity that he was known for.

That's not what got him in prison, actually.

It was tax evasion.

And so this is the classic story of like,

man, you can maybe get away with a bunch of other things,

but if you mess up with taxes,

that's the government's an enemy

that you don't really want in that regard.

Bit more lighthearted here on the podcast

in terms of what we're talking about in that way.

But, you know, for regular people,

if you've got employment income,

just like regular old employment income

and filing taxes is a pretty simple process,

I would very highly encourage you to go through the process

of putting together your tax return and filing

because there are a number of benefits

beyond getting some of your money back

like this whole tax refund thing,

you're probably going to be entitled to some refund

because there's a number of credits and deductions

that you qualify for through the filing process.

But there's benefits that are tied to your

and in some cases your household income

and you don't even get them if you don't file.

So filing is kind of the baseline expectation

to be able to get some of these benefits.

So what are these?

Well, first one, getting your money back,

that's like your refund.

The next one would be the GST credit,

super common for many households to qualify for that,

but if you don't file your taxes, you don't get it.

Next one for families, Canada Child Benefit,

this can be hundreds of dollars every single month,

tax-free, it's tax-free income,

but it is scaled back based on your household income.

So there we go again, you got a file to be able to get it.

If you don't file, they don't know what your income is

so you just get cut off from the system altogether.

This is super critical for people that have kids.

You definitely want to qualify for this one.

What else do we have here, Sam?

You know, one thing to talk about,

maybe this kind of comes into in the initial years

where you're filing taxes and maybe your student

to just starting university at 18 and you haven't filed yet,

but once you do start filing,

you're able to compile and carry forward

unused tuition credits.

So if you're paying for tuition,

that can lead to some tax deductions in the future.

If you kind of build up with CRA,

all those tuition credits you've paid for

as part of your education.

So another thing to keep in mind

that kind of having that tuition information

from a post-secondary institution

can be valuable down the line as well.

Another point that you listed here was,

when you file your taxes,

that is how they calculate RRSP contribution room.

And so if you're not filing, you don't get the rooms.

You can't benefit from the present day tax benefits

using an RSP and having the tax deferred growth

that happens inside of it.

So if you're not filing at all,

an RSP is not going to be an eligible option for you.

Final thing here that I'm thinking about

for my clientele that are typically closer

to their retirement years is old age security.

And so that's a benefit that shows up at age 65.

You can defer it past 65.

You've talked about it on the podcast a number of times before,

but if you don't value, don't get it.

The secondary benefit that gets tacked on

old age securities called the guaranteed income supplement,

this can be really significant for people

that have low taxable income.

So if you're someone that thinks like,

I don't make any money, so I'm not going to file.

It's like, no, that's the perfect scenario to file

because there's a lot of low income benefits

for people that can prove that they do actually

have low taxable income.

So if you don't file, you won't get OAS

and you won't get the guaranteed income supplement

or even just be eligible for those ones.

So all sorts of things like this,

benefits are on the table for people that file.

And if you owe money, again,

this is where you want that to come into the light of day

so that even if you can't afford it,

you can talk to the government and put together a plan

to repay that money, but also just pay your taxes.

If you owe money to them, get it done.

Have a system in place to make sure

that you are on the straight narrow with Siri.

Right, exactly.

And I think maybe this is a good time to talk about some

maybe the quirks of the CRA website,

just as far as what you can expect to see on there.

How long is this podcast going to be?

We don't have to, you know,

belabor the point, but we had talked kind of in advance

of this about a few things.

But for example, you know, sometimes the RSP

and the TFSA room as it shows in your CRA account

is not perfectly up to date

and it takes a few months to update that.

Also, if you're doing charitable donations,

it's useful to know that you have to manually

add those into CRA.

They're not automatically done.

So whereas for your income, often your T4 is already

kind of a cent or CRA is well informed about your income

prior to you submitting your taxes and things like that.

Yeah, this is the funny comment that people often make.

It's like, you know, why do I have to file my taxes?

If they already know how much money I made,

and you know, there's some very funny scenarios

that I've seen that play out on social media.

And such a scenario where it's like,

well, you gotta tell us how much you made.

But you already know.

It's like, well, you gotta tell us though.

It's like, this is true, but there are some things

that they don't know.

And charitable giving is one of those.

So if you have receipts from any charitable gifts

that you made throughout the year,

those will not ever be automatically submitted to CRA

unlike your T4s.

So you do have to make sure that you file those

and get them into your return

so that you can hopefully get a bit of a refund back

or just account for it in your return

as far as the credits go.

Yeah, I was just talking to a client in the last few days

that was having some similar issues

with their first home savings account, documents,

kind of CRA not being aware of

whether those contributions were actually made

and ultimately having to provide those documents

directly to CRA.

So there's, anyway, lots of places where

just kind of being aware of what additional information

CRA might need is valuable and could help streamline

that tax process, which is not super enjoyable

for lots of people come this time of year.

So when it comes to filing taxes,

we've heard this a couple of times,

people that work with an accountant,

I've heard people say, like,

oh, I've got a really good accountant.

He makes sure I get a really good refund every year

and it's like, okay, that's,

to me, that's a little humorous

because, you know, a really good tax filing

can only be accurate.

You can't really get creative

and like do like good work to get more money.

Like this isn't an effort or skill-based endeavor

at this point.

It's just a submission of information

and as long as that information is accurate,

the refund you're entitled to is the right amount.

There isn't some like, you gotta get my guy

to drum up some more money

if things are being done illegally

then that is not a good guy

that you should be dealing with.

But as long as your information is filed appropriately,

there's no, okay, here's another gripe.

If you look online, YouTube's like,

tricks the CRA doesn't want you to know.

It's like, no, not exist.

This is fundamentally untrue.

Everything that works within the tax code

is no like one-off tricks really

when we're dealing with filing taxes.

Once you get into corporate taxes

and you've got equipment that you're depreciating

and you're doing major purchases

and you're financing things and whatever,

it's like there's certain things

that you can carry forward into other years perhaps

like depending on one's situation

so there could be some decisions there.

But the real value in paying less taxes over time

is a comprehensive look at your financial situation

and planning for things in advance

because if you don't have enough time,

there's no one-off planning

that can meaningfully improve your financial situation.

So by the time you get to filing your return,

the bed has been made.

That's the situation.

There's not really a whole lot of other options

that you have at that point

but if you're looking to meaningfully reduce your tax bill

over time, if you're looking out 10, 20, 30 years

up until your final tax return,

that's where some significant tax planning opportunities exist.

So I don't know what the public service announcement is here

but perhaps don't overthink it

if we're looking at filing time,

fill in the information,

give them the information that you're looking for,

make sure it's comprehensive

and that's your situation.

But for people that are getting into the retirement years

and particularly post 65,

so this is your age 65 year that you're filing for.

This is where some of the biggest changes happen

when it comes to filing taxes.

Sam, I'm rambling here.

Feel free to interject if you want

but I'm getting in the groove on taxes here.

But if you're 65, this is where things meaningfully change

on an annual basis in terms of how you can process your income

because during your whole life employment income

cannot be shared with a spouse.

Once you're over 65,

I'm giving the abbreviated version here

but pension income splitting becomes much more

of a reality post 65.

You know, most people listening to this

that don't have a pension are screaming at their speakers

right now is like, I don't have a pension.

Why don't I get, okay.

So CRA lets you consider an income out of a riff.

So this is the second half of your RSP.

So money that comes out of a riff after age 65

can be shared with a spouse, okay.

And 50% of it can't.

So you can't say one of you is still working

or something like that.

You can't send all of it over to your spouse

and kind of drum up some artificial income splitting that way.

But you can share up to 50% of riff redemptions with a spouse.

So that is the big thing that can kind of change

a risk potentially with that is doing that incorrectly.

So in some cases, I have seen this personally once

and it was not fun that I had to inform them

that I discovered this.

But when you're doing the income splitting,

you have to make sure that not only are you reducing

your own taxable income by the elected amount

but that the other spouse is then claiming it

as income on their end, right.

So your tax bill as the person

that has the riff income is being reduced

but your other spouse is then being increased

by the same amount.

The benefit here of doing that

is that we have a progressive tax system

and so that you can both in theory take advantage

of lower tax brackets more equally

than having more income overloaded into one of your names.

So I'll take a breath here, Sam.

But those are some of the things that kind of come up.

Like one, like you can't really move the needle too much

but now like if you're post 65,

it's like yeah, actually you can start to do that

but it's still done within the bounds

of things that you're perfectly allowed to do.

Right, so just to put a finer point on the example

you gave in that case,

the income was being taken off one end

but not being accounted for elsewhere.

So there was all this income kind of floating in the wind.

Yeah, yeah.

And so then that led to some adjustments

that needed to happen.

So important to implement that

but still by doing that income splitting after 65,

especially out of a riff can reduce the taxable income

of one spouse and kind of divide that more evenly

so that you can be in a certain tax,

bracket or tax level by doing that.

That's more advantageous.

You pay less tax kind of ultimately

between the two of you.

For sure. Yeah.

And there's, you know, as you can imagine,

if a couple has RSPs, TFSAs,

they might have a defined benefit pension

like a traditional pension that we would know.

They might have a lira that turns into a lift.

They might have non-registered income

that's a bit so dividends

whether they like the income or not

might still have some employment income, whatever.

This is where planning really matters.

So talking about the concept of tax planning in advance,

when we do our financial plans with folks

and we're planning for a future retirement,

we can start to project out a system

for how you're gonna develop that retirement paycheck.

And, you know, there's a variety of different ways

you can think about taxes.

In many cases, front loading the tax bill

a little bit more to preserve your estate

from taxes can be an effective way of doing that.

But in other cases, there are situations

where kicking the tax can down the road

can allow for some of the compounding growth

to continue to happen.

And so there's no right or wrong way

to do tax planning in that case.

But I think the best tax planning is done

in the specific context of one's own financial situation.

Yeah, I would say in the majority of the financial plans

that we've done since I've been here,

certainly there's a tax component

that is being implemented kind of as a long-term strategy.

So we're seeing what we project

certain accounts to look like over time.

And then almost always we have some kind of withdrawal

strategy in order to strategically kind of influence

the tax bills that will ultimately come do at some point.

So it's an absolutely essential part of that process.

Yeah, it's less of a creativity

with the filing or anything like that

is just choosing when and where we're gonna pay taxes

and how we're gonna do it within the system

that currently exists.

Of course, taxation can always change.

We saw a number of those proposals over the last year,

even in some of them get rolled back.

And so this is where ongoing tax planning is really critical.

And again, not putting the burden on the present day filing

because once you get to filing day,

it is what it is at that point.

Right, exactly.

And maybe bringing it back to how the present day filing

and the long-term planning intersects

and one thing we talked about in advance of our podcast today

is just the importance or the potential value

and kind of how significant the actual tax refund

can be in this ongoing financial planning.

As far as this is something that most years people can,

it's not always the same.

And year-to-year, the refunds.

Almost made it.

Oh, gotcha there, yep.

The refunds change.

But just kind of this, some of money that is often received

a certain time of the year that isn't necessarily

allotted to a budget because we can't anticipate exactly

what that will look like.

But how might, from a financial planning perspective,

we use those refunds to forward some

of those long-term financial goals?

There's a lot of options with it

because when you get a refund, it's not bonus money.

It's because you already gave CRA more money

than they want for your situation.

So it is your own money that you are getting back.

So if you just think about it in that context,

I'm like, okay, well, I've got $4,000 that I miss,

not by no fault of your own likely,

miss allocated towards taxes.

What else could I do with it?

Like, cool thing is, the world is your oyster.

Like, you can do whatever you want with it

and bless you to make that decision

that makes the most sense for you.

But what the vast majority of people do,

maybe not ones that listen to this podcast,

but maybe, and it's no crime,

they use it for additional spending, right?

And in some cases, that's completely necessary

and that's totally fine.

But I've heard of people that it's like,

okay, we'll see what kind of vacation we go on this year

based on how much of a refund we get.

Like, cool, man, is that the most optimal way

to plan for major spending?

It's just hope I overpaid in taxes by a lot this year.

It's like, ah, we could be a little bit more intentional

with how we plan for major purchases that way.

Who knows?

But, you know, spending it is one option.

Again, that's fine.

It's your money you can do with it.

Want with it?

But if we're gonna use our forced savings,

which is what we can call a refund here,

to, you know, improve our financial life,

spending it's probably not the move.

A couple of different things that can really make a difference.

If you have high interest debt,

no brainer first place to put it.

So if you've, if you're dragging out a credit card,

that's gonna cost you like over 20% in interest,

no better return than paying off a credit card.

So if you get a refund and you've got high interest debt,

throw it on there, that's a great way

to really improve your net worth and your cash flow

because you don't have that interest drag

on your monthly cash flow,

or they still will be smaller or whatever your case is.

High interest debt, that's a no brainer.

Another thing from there, if you've already

kind of dialed that in, I really like using tax refunds

or recommending it to people to accelerate their savings rate.

And so like we've talked about,

it's kind of like you did forced savings already

because it was money out of your pocket

that it's in someone else's hands now.

So what you need to do is make one good decision.

So when you get it instead of spending it,

you just say, you know what?

That was money that I've already kind of pre-allocated elsewhere.

Let's just put it towards my future self

and you know, you can really accelerate your savings that way.

Maybe we should do some case studies on this.

We've kind of talked about that,

but the strategy I'm often recommended to people

in the context of their big picture plan.

If it's tough to scrape together enough like cash flow

like month to month, using the tax refund

as a way to build up savings is super effective.

So in some cases, I've recommended even to people

that aren't traditionally high income.

I've said to contribute to RSPs

because in many cases again with families,

if you have lower taxable income,

which again, happens via RSP contributions,

you can even get more Canada child benefit.

We've talked about this on the podcast before.

All these other income tested benefits for families

at the household level,

RSPs can really improve those metrics for you,

but it can also generate a larger refund.

So then that refund, if you have TFSA room,

if you contribute to RSPs, you get a refund

and you pop that over into your TFSA.

Now you've kind of got this savings engine building

of the tax deferred RSP pre-tax savings in the RSP.

And then you take the refund

and you start building up your TFSA for flexibility

and tax free spending in the future.

The RSP TFSA comparison, it's not a competition.

They're both awesome tools.

And if you could get to your retirement years

and have a really solid combination of those two,

boy, now you've got options.

You've got tax planning opportunities.

You've got large purchase optimizations that you can make.

You've got a state planning benefits

that you can have all these different things.

But if all of it is in one or the other,

again, you're totally fine.

If you've got tons of money in an RSP,

like you're not gonna be on the street

or anything like that.

But if you're looking for a very simple way

to build up a really tax smart,

I hate tax efficient, that tax smart future for yourself,

making RSP contributions and using your refund,

even most of it, like you don't have to use all of it,

whatever, just take some of it

and put that over to your TFSA

and keep building up both of those every single year.

Boy, it could be a really nice position in the future.

Right. And so what I'm kind of what I'm hearing

and taking away from that useful description

is that it's maybe reframing tax refund funds

and kind of what they can be used for.

Because I think it's often viewed as you're saying

as, oh, this is great.

I've got a bit more cash than I thought.

We can put this towards something fun.

And we're definitely saying we want people to travel

and have fun and live fully and all those things.

But if you can intentionally plan for those trips

and things as part of your regular budget,

then the tax refund becomes a new kind of source

of savings you've already done that can be used

to optimize saving in other areas.

Yeah, a bit more of an accelerator that way,

because we like to be intentional

with the family time, with vacations,

with major purchases, renovations,

having a specific plan for those is great.

And so that when the refund is a little bit more variable,

and you don't really know what it is,

using that for additional savings

or popping it back in the RSP even,

using it as a paying down high interest debt

that maybe you're hopefully already had a plan

for paying off, but you can pay it a faster.

I love seeing that tax refund be used as an accelerant

as opposed to a contingency plan of, like,

oh, well, I guess, you know, depending on what we get

this year for a refund, then that'll determine

how our summer looks like.

Let's do it the other way around, right?

And so you can do whatever you want, you know,

and people's situations are completely different,

but if we can kind of put the intentionality on the front end,

and then use this as the opportunistic growth plan,

ah, man, that's a fun way to utilize it to a tax refund.

Did you just make taxes fun?

Oh, taxes are always fun, yeah.

No one has accused me of that before,

so yeah, then maybe we won't start.

But yeah, so I think that's probably a good place

to wrap up in lots of ways with tax season ongoing,

to think about why we actually file taxes

and the importance of doing that,

what the kind of long-term planning relationship

to tax is, and then how we can meld those two together

and use tax refunds as an accelerant for saving

if that fits into your circumstance.

Sam, thanks for the summary there.

We appreciate everybody for listening today.

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of the Canadian Money and Roadmap, take care.

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