You were a good citizen. You were organized, gathered all of your tax forms, receipts and filed your taxes promptly.
As a result, you are now the recipient of a nice chunk of change from Justin and the Premiers in the form of your tax refund!
Your tax refund might feel like free money, but it is not. In actuality, this is the repayment of an interest-free loan that you gave the government without even knowing it. Throughout the year, you either make periodic remittances if you are self-employed (or otherwise required) or you have tax taken off each paycheque by your employer. Your tax refund is the return of overpayments that you made relative to the income tax that you actually owed at the end of the year. Hence, this is why it is called a refund. Your tax refund was indeed your money all along.
But now, the big question is, “How should I use my tax refund?”
Before you buy that new iPad or fly to Jamaica, here are a handful of recommendations.
1. Pay Down Consumer Debt
Consumer debt is debt related to consumption, instead of debt that is tied to an asset that can appreciate.
This is priority #1. This would likely be priority #1 on any list for that matter. Paying down your consumer debt is so important that it should likely be #1, #2 and #3 on this list.
This prolonged low-interest rate environment that we have lived in seems to have lulled many Canadians into a false sense of security around carrying consumer debt. According to the 2018 BDO Affordability Index, 46% of Canadian households don’t earn enough income to live debt free.
But not all debt is created equal. The largest area of concern is high-interest debt. High-interest debt generally comes in the form of credit cards (up to 20% APR), payday loans (>100% APR and upward), and high-interest lines of credit (10% APR or more). Rates mentioned are illustrative and not a minimum threshold for concern.
If you are carrying high-interest debt, paying it down will almost always be the best use of your funds. You should focus on paying down your debt with the highest interest rate first.
In essence, consumer debt is what you owe for the material things or that you already have or the experiences that you have already had. To put it another way, instead of using your tax refund to buy an iPad, you still need to pay for the iPad that you purchased years ago.
2. Open An RESP For a Family Member
Education costs are continually on the rise. A year of post-secondary education at a Canadian university can cost up to $20,000. Starting to save early in a child’s life is prudent given the rising costs.
RESPs are an excellent way to save for a child’s education for a few reasons.
The Government of Canada matches 20% of your contributions, up to a maximum of $500 per year. This is called the Canada Education Savings Grant (CESG).
There is also lifetime maximum for CESG contributions that the government will make of $7,200.
Money held within an RESP grows tax-deferred. Similar to an RRSP, all of the growth of the funds within the RESP has the benefit of tax-deferred compounding. Tax-deferred investment growth has been proven to be a winning wealth builder.
Unlike an RRSP, contributions made by yourself into the RESP are not deductible from your income. As such, you will be contributing after-tax dollars into the account, similar to a TFSA.
However, the CESG amounts and the investment income are then taxed in the hands of the beneficiary (i.e. your child or niece/nephew) upon withdrawal. This can provide significant tax savings. Students are typically in a low-income period of their lives during schooling, and they should generally be in a lower tax bracket than the contributor during this time.
These advantages should be capitalized on early and often in the life of the beneficiary to maximize the CESG and tax deferral. Use your tax refund to start an RESP and take the free money!
3. Contribute to your RRSP/TFSA
If you don’t require the free CESG money for a family member, you can shift your attention to your personal savings.
Whether you contribute to your TFSA or your RRSP will vary based on your individual situation. I prepared a rundown on things to consider when answering the question, “Is an RRSP contribution right for me?”
When making your determination of where to put the money, the primary question that you should ask is “When will I need the money?”
Funds in your RRSP are intended for your retirement, but they could also be withdrawn to buy a home using the Home Buyers Plan or to go back to school via the Lifelong Learning Plan.
Another perk of an RRSP contribution is that it can increase your tax refund for next year if you deduct it against your 2019 income.
If you need this money for the near term (other than for purchasing a home or for going back to school), TFSAs provide added flexibility around withdrawals. This is an ideal place to keep your emergency fund. If you do not have an emergency fund in place, then bump this up ahead of the RESP plan in terms of priority.
If you have questions around what option is best for you, you should speak with a financial planner.
4. Mortgage Paydown
The market is sending mixed messages about where interest rates are going in the intermediate term. However, we know that we have been experiencing a prolonged low-interest-rate environment.
The party should come to an end sooner-or-later, and rates could rise.
There are a few key benefits to paying down your mortgage:
As rates rise, so will your mortgage payments on a variable mortgage. Even if you have a fixed rate mortgage, it will come up for renewal inevitably, and all else being equal, your payments will increase along with the interest rate.
Let’s assume that you have a mortgage rate of 3.5%. By paying down a portion of your mortgage, you have just achieved a guaranteed after-tax return on your investment of 3.5%! I challenge you to find a guaranteed investment that will pay you that rate of return after-tax.
This guarantee, however, doesn’t contemplate foreclosure risk, or any of the other risks associated with homeownership. That said, paying down your mortgage is an excellent way to achieve your long-term financial goals.
As you lower your outstanding balance, your monthly payments become lower. Some mortgages implement these changes immediately, while others will update the payments a set interval. In either case, when you have less to pay back, you can pay less each month.
A lot of digital ink has been used lately discussing the challenge that some are facing renewing their mortgages.
The Government of Canada introduced rules to stress-test an individual’s ability to afford their mortgage payments when rates rise. As interest rates rise, so does the benchmark rate for the stress-test.
By paying down your mortgage, your outstanding balance and future payments will be reduced, and this will ease the challenge of meeting the stress test.
When deciding whether or not to use your tax refund to pay down your mortgage, you should investigate the repayment terms before making your decision. Some are flexible, while some are stringent and may come with fees or penalties. Speak with a professional to understand the implications of making a pre-payment against your mortgage.
5. Get a Fee-Only Financial Plan
Naturally, this is a self-serving recommendation, but I wouldn’t be doing my job if I didn’t mention it.
A financial plan is an investment in your overall financial well-being. Having a solid financial footing sets you up for success in all other aspects of your life.
A good financial plan can help you better understand your spending, ensure that your investment mix matches your risk tolerance, identify if your current savings will allow you to reach your goals, assess your risk management, or map out how to make your savings last through retirement. And let’s face it, if you are reading this article, then you probably have questions about how to optimize your financial situation.
A financial plan can also help you assess each of the above options for the use of your tax refund based on your individual situation.
An additional benefit is that many of Novel’s clients have been able to achieve significant savings on their investments by executing a Novel Fee-Only Financial Plan. This ultimately means that, depending on your current investment products, the cost of a fee-only financial plan can pay for itself, even in the first year! Investment options that can pay for themselves tend to be few and far between in this day and age. Taking steps to secure your financial well-being is an excellent use of your tax refund.
Don’t be so quick to spend that tax refund. After all, it was your money to begin with, not the government’s. There are several things that you can do to put that money to work for you. Each of the options have pros and cons, and they may not all be appropriate for your situation. Resist the urge to spend it frivolously and instead use your tax refund wisely. Then again, sometimes you just need to go to Jamaica.
If you would like to schedule a free consultation to discuss your options for maximizing the use of your tax refund, please contact us.
Talking about death is something that we all look forward to, no doubt… But the reality is that contemplating our own mortality is less about the impact that it has on ourselves, but rather the effect that it has on those around us. Estate planning is not just for the uber-rich, but rather a critical aspect of financial planning for all Canadians.
According to a recent study by the Angus Reid Institute, 49% of Canadians surveyed either don’t have a will in place, or their will is outdated. This number skyrockets to 85% for those in the 18-34 age bracket. With so many Canadians leaving themselves exposed, it is probably a good idea to go over what happens if you die without a will.
NOTE: This post should not be considered legal advice. If you have any estate planning questions, please consult with a professional to assess your individual situation.
In Ontario, the Succession Law Reform Act governs what happens when someone passes away without a will in place, known as dying “intestate”. In this case, your affairs will be handled in a prescribed manner.
A key reason why you need a will is that you can name the executor of your estate. The executor is responsible for the administration and distribution of your estate along with the wishes that you have expressed in your will. When you pass away intestate, you have no executor named. As such, your closest relative will likely be appointed as your personal representative. In many cases, this may not be an issue. However, in some cases, you may not want the individual named to be acting on your estate’s behalf.
The added benefit of naming an executor is that they can be adequately prepared for the responsibility. Before appointing someone as your executor, you should have a conversation with them to ensure that they are up to the task and related responsibilities. The role of executor tends to be time-consuming, and you should be mindful of this when naming someone to the position.
If you have children, it is non-negotiable that you have a will. If you die intestate, you will have lost the opportunity to dictate who should be responsible for your children. In this scenario, the courts will determine who is the most suitable to become your children’s guardian.
An added piece of importance is in the situation where you have a dependent child. Without leaving instructions for their care, or setting aside specific funds, your dependent child may not receive the long-term care that you had intended.
Your property is distributed based on the following:
Your entire estate goes to your spouse. However, this only applies to legally married spouses. Common-law spouses are not automatically entitled to receive anything if you die intestate.
Your spouse is entitled to a of your estate, up-to-the first $200,000. What remains is now referred to as the . If anything is left over, the residue will be divided between your spouse and your children.
The children each inherit an equal portion of your estate. If any of your children have passed away, then their share would pass on to their children (i.e. your grandchildren).
Your parents inherit your estate.
Your brothers and sisters (or their children if a sibling has passed away) receive an equal share of your estate.
Your nieces and nephews each inherit an equal portion of your estate.
All other next of kin inherit an equal portion of your estate. The determination of next of kin is performed using the table of Consanguinity (courtesy of Wikipedia).
Your estate goes to the Ontario government. Not who you had in mind for a charitable donation to as part of your estate plan was it?
Here is a helpful infographic on the topic.
Unlike your children, the courts will not make a separate determination of whom the best caregiver will be. Pets under Ontario law are considered Property. As such, they will be subject to the division of property rules above.
When you pass away, your representatives must file a final income tax return on your behalf. This return comes with very particular tax planning opportunities, which are lost when you don’t leave a will behind.
When it comes time to validate your will, it goes through a process called probate. Probate is also required for those that die without a will. According to the Ministry of the Attorney General, the probate process exists to:
Part of the process involves the Estate Administration Tax (EAT), or what is more commonly referred to as the ‘Probate Tax’. EAT is charged on your residual estate (i.e. everything that is left over after filing your final tax return). Between your final income tax return and the EAT, significant taxes could end up being paid that could have been avoided if you do not have a legal will in place.
Without a legal will in place, the arrangements will be left solely up to the discretion of your personal representative. As mentioned above, this individual will be court appointed and may not know your wishes.
As per the Angus Reid study, there are a few key reasons that our estates are not adequately planned for.
“Of course, 18-34-year-olds without a will are significantly more likely than other Canadians to say they are too young to worry about having one written – nearly half (46%) indicate as much. As they get older, Canadians are more likely to cite a lack of assets as the reason they do not have a will in place.”
Surprisingly, only 8% of respondents listed “not wanting to think about death” as their primary reason for not having a legal will in place. So, it appears the morbidity of the topic is not the deterrent that we may have thought it was.
The 3rd most frequent answer provided as their deterrent was cost. 18% of respondents indicated that ‘It’s too expensive to get a will written’. As with many industries, estate planning has seen its share of ‘disruption’. No longer do you have to travel to a stuffy lawyer’s office and be gouged for their expertise. Not requiring a lawyer is especially true for the average Canadian whose estates are not very complicated. This is likely the case for the 48% of respondents who thought that they were either too young or didn’t have any assets to consider.
For those with simple estates, who live in Alberta or Ontario, Novel recommends Willful as a great option to obtain a legal will in as little as 30 minutes. Their premium package includes a will as well as a power of attorney for property and a living will for $150 plus tax. Also, we have negotiated a 10% discount with them if you use the promotional code ‘Novel10’ at checkout (read more about our affiliate policy).
The best part of using Willful’s service is that your will can be updated as many times as you would like, for free, forever!
That means that there won’t be any legal costs incurred to update your estate when you move to a new home, purchase a new car, or welcome a newborn for example. Just remember, when you do make updates to your will, all previous copies should be destroyed.
Similar to Willful, there are a number of options out there that can provide you with templates or documents that you can work with. That said, you should never draft your own documents and any templates that you use should have been reviewed by a lawyer. And rest assured, Willful has had a many lawyers aid in the drafting of their documents.
Once you have a will drafted using one of the various methods out there, you need to have the documents witnessed/signed by two parties who are not named in the will. For example, your executor cannot serve as the witness.
Once signed, the hard copy location needs to be shared with your executor. This will ensure that your executor can quickly access it and begin the process. Unfortunately, at present, digital wills are not acceptable. Hard copies with signatures must be kept as the official document for your will and power of attorneys.
That’s it. You now have a legal will!
In 2019, far too many Canadians still either don’t have a will or their will is out of date. Don’t leave your loved ones in a precarious position, by not having a will. Not having an up to date legal will can create many complications for your estate, and your wishes may not be addressed appropriately. Many tools are available for you to create your will and keep it up to date.
Did you find this article helpful? Did we miss anything? Please let us know in the comments.
Many people living with a mental illness report that negative stereotypes about mental illness, and the resulting potential for discrimination, cause them more suffering than the illness itself. As a result, two-thirds of those suffering from mental illness are too afraid to seek the help that they need.
Mental illness affects people of all ages and from all walks of life. It can take many forms, including depression, anxiety and schizophrenia. Most individuals find ways to live with their illnesses but how they are treated by others often proves to be more of a challenge than the illness itself.
As another successful Bell Let’s Talk Day draws to a close, breaking stigmas and changing the conversation is top of mind for many Canadians.
Your finances are a key building block to your overall life goals. When we are on a solid financial footing, the rest of our lives become easier.
Unfortunately, one of the largest causes of stress and anxiety for most people is around money and their financial situation.
According to a study commissioned by the Financial Planning Standards Council, stress caused by money isn’t getting any better. This study was performed in 2014 and updated in May of 2018. This study did not include participants from Quebec.
An interesting metric from the study was whether or not people felt pressured to keep up with their peers’ financial status. This metric increased since the 2014 survey from 20% to 23% in the most recent survey. This rate was most pronounced within the 18-34 age bracket at 52%. This is hardly surprising given this demographic’s use of social media to share their best selves with each other and the world.
“Too many people spend money they earned… to buy things they don’t want… to impress people that they don’t like.” –Will Rogers
Adding to the stigma is that Canadians tend to be embarrassed when it comes to money. They seem to think that they might be the only ones making financial mistakes.
The FPSC study found that 51% of Canadians are either always or sometimes embarrassed about lacking control around their current financial situation, up from 44% in 2014. Similar to the pressure measure above, this was most prevalent in the age bracket of 18-34 which sat at 70%. The embarrassment rate also declined as the age of the respondent increased.
However, given the levels of consumer debt in Canada, this embarrassment may not be warranted. You are not alone in your concern around your money decisions.
Our financial planning services tend to cater more toward those with manageable debt and assets that they need to manage. Their stress tends to come from not knowing if they will have enough for retirement, or not knowing how much they need to save for their children’s education, etc. These are examples of very common concerns experienced by the typical Canadian.
However, there is a significant portion of the population that live paycheck to paycheck and have sizable concerns about their debt.
BDO published their first inaugural affordability index and found that 3 in 4 Canadians have personal debt and that the average non-mortgage personal debt is nearly $20,000 per person. This would include car loans, lines of credit, credit cards, etc. This means that the average Canadian couple carries nearly $40,000 in non-mortgage debt. These are alarming numbers.
For the segment of the population in debt trouble, the situation can snowball quickly. High-interest debt, such as payday loans or credit cards, are a primary cause of the growing debt problem. High-interest debt payments can often have little-to-no impact on reducing the balance owing.
Compounding this problem is that the social stigma around money makes it difficult for people to discuss these issues openly, even with finance professionals.
The debt carriers often don’t know where to turn.
They don’t think that there is a light at the end of the tunnel.
But there is.
Feeling like you need help is okay.
Most people need help when it comes to their finances. For those that feel like they need help with their debt, there is a solution. Credit Counselling Canada (CCC) is the national association of not-for-profit credit counselling agencies that work provincially, regionally and locally throughout Canada. Only not-for-profit or charitable organizations are accepted as association members according to their website. One such member organization is Credit Counseling Society (CCS).
These organizations can help those with debt issues develop a plan to tackle their money issues head-on. CCS has a summary of their recommended approach to dealing with debt stress and tackling your debt problem.
This is only one example of the CCC member organizations, and anyone of their member organizations will be able to assist you.
“You must gain control over your money or the lack of it will forever control you.” –Dave Ramsey
Studies show that money is the #1 cause of stress for Canadians. Social stigma prevents us from speaking openly about our financial situations, as we often feel pressured to keep up with the lifestyles of our peers. This is only exacerbated in the social media era.
As money anxiety grows, people need to be aware of their options. For those with significant debt, a non-profit member organization from Credit Counselling Canada will assist you in tackling your debt challenges. For those with manageable debt and assets to manage, fee-only financial planners can ensure that you receive unprejudiced advice to help you establish a solid financial footing, take control of your finances and reduce your stress.
Don’t let social stigma around money prevent you from addressing your challenges. You are not alone. There is light at the end of the tunnel.
In case of an emergency, please call 911 for immediate help.