Right now is the tax season and here is a report from Yahoo! Canada shows how many Canadians will use the tax refund to pay their debt.
Fewer Canadians to use tax refund for debt repayment
By Liam Lahey
Supposing you'll get a tax refund, what will you do with it? A survey commissioned by a tax software maker finds fewer Canadians will use their refunds this year to eliminate personal debt.
Dr. Tax Software, better known for its UFile ONLINE and UFile for Windows do-it-yourself tax return products, finds only 29 per cent of Canadians plan to use their refund to pay down debt, representing a 14 per cent drop in comparison to the company's 2009 consumer poll.
"Fourteen per cent is pretty substantial considering the Bank of Canada is constantly telling us we have to pay our debts," remarks Joanne Birtch, vice-president of marketing, Dr. Tax Software in Toronto.
The national survey, which polled Canadians aged 18 and older, also reveals that location affected respondents' plans in using their refund for debt repayment.
- 35 per cent of respondents in Quebec and the Atlantic provinces plan to use their refund to pay down debt
- 21 per cent of respondents in British Columbia will use their refund to pay down debt, the lowest percentage among the provinces.
The survey also finds that those under the age of 50 are more likely to use their return to pay down debt (37 per cent of those aged 30-49, 36 per cent of those aged 18-29), compared to only 21 per cent of those 50 and older.
"It seem the older demographic has been able to take advantage of the low interest rates and thereby get rid of a lot of their debt," Birtch says. "People that are younger also appear to be taking advantage of the low interest rate and are enjoying their lives more but they are apt to be using their refund as part of a financial plan."
Meanwhile, a Yahoo! Canada web poll of more than 1,800 respondents found:
- 52 per cent of people say they will use their return to pay down debt
- 30 per cent say they'll use it to invest
- eight per cent plan to take a vacation
- six per cent will put their refund towards a big-ticket purchase
- five per cent plan to "go shopping"
Cleo Hamel, a senior tax analyst at H&R Block in Calgary, says it seems the number of people applying their tax refunds to debt is decreasing but that could be due to an assumption that they're not getting any funds back from the government.
"With the times being what they are, some people didn't make their RRSP contributions and that's probably a driving force creating that refund," she says. "There's also a number of people who unfortunately consider their tax refund as a forced savings account. They never have plans to use these funds towards anything but some project like a vacation."
Be that as it may, if you are receiving a substantial refund, Hamel recommends you consider using your return to invest if paying down personal debt isn't a high priority.
Through your employer, you're paying into Canada Pension Plan (CPP) and Employment Insurance (EI) premiums. If you make more than $48,000 in a year, at some stage you'll max out your CPP and EI payments.
"Your paycheque will then be increased by the premium amount. A lot of people forget that they have that," Hamel says. "It could mean a couple hundred dollars worth of income. Why not use that money for your RRSP contribution, a tax-free savings account or to paying down credit card debt?"
Maximize your tax refund
Furthermore, she advises against relying on getting a loan to invest in an RRSP towards the end of the year.
"If you talk to financial people, they'll tell you the sooner you can get your money into a savings, the sooner you'll start earning interest or dividends," she adds. "Realistically speaking, today, you should have already made your RRSP contribution for the following year."
Be proactive in terms of using all the tax credits available to you. As a tax refund comes in one lump sum and depending upon one's financial situation, she also advises to use it to pay down your mortgage or to invest in your child's RESP.
"As parents, one of the challenges we have is we're worried we're not able to contribute to our children's savings plans for their future so perhaps the tax return is the best way to do that," she says. "Don't forget, the government puts a grant in RESPs for whatever monies you contribute."
Hamel also strongly encourages individuals to ensure they file their return by/before the April 30 deadline and avoid the five per cent penalty the CRA will apply to your return for tardiness.
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By Antiao H