Tax refund shows poor planning, tax expert says

(March 29, 2004) Is your client getting a big fat tax refund this year? If so, they’re being too generous with Ottawa, according to Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark Investments.

“A refund is a sign that you’ve overpaid taxes,” he says. “By the time you get that refund in May or June, it could be up to 18 months that you’ve made an interest-free loan to the government.”

Golombek and AIM Trimark are embarking on a quest to educate investors, extolling the virtues of reducing tax at source — the practice is well-known in the investment industry — but one that can be a tough sell for an advisor whose client is afraid of complicating their taxes.

“It’s either laziness or fear of complication or complexity,” says Golombek. “But we’ve come up with a three-step process to make this as easy as possible.

The new Reducing Tax At Source Guide demonstrates the ease of the process. The client really only needs to fill out a T-1213 tax form, file it, and open a pre-authorized chequing plan which will make automatic deposits to their investment account.

“The idea is to plan your tax situation in such a way that you don’t get a tax refund. The biggest reason Canadians get a refund is because they make RSP contributions,” says Golombek. “If you’ve making an RSP contribution at the beginning of the year, or even on a monthly basis, you can simply apply to the CRA to get a waiver so your employer will reduce the amount of tax from your paycheque and therefore ensure that you don’t get a tax refund.”

The report includes tables and graphs that help advisors demonstrate to their clients the advantages of this strategy.

Golombek says AIM Trimark is also offering a number of additional pieces for the advisor, including prospecting letters, reminder postcards and a calculator to demonstrate to the client the impact reducing tax at source can have on free cash flow.

And the beauty of the plan is that it’s painless.

“The investor doesn’t miss the money, because the same amount of net pay is coming into their account,” says Golombek. “Instead of that money sitting with the government for the rest of the year, that money is invested on a regular basis.”

He points out that the waiver must be filed every year, but that it is a small task, given the benefits it brings. The only change the client will have to adapt to is the absence of the refund each spring, but Golombek says this money is rarely put to good use anyway.

“It’s not free money from the government, it’s your own money,” he says. “When people get a refund, they’re often tempted to spend it on some kind of luxury.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com