People work hard for their money, but don’t make their money work hard for them. It’s time to fix that. The last Wednesday of every month, Saverist whips your income into shape with smart, practical advice.
Photo by Dipp from the Torontoist Flickr Pool.
The deadline for income tax returns looms with only 34 days left to file. People dread doing their taxes, but the fear is irrational: most people have already had the tax skimmed off of their paycheques. In fact, those who contributed to their RRSPs should expect a refund, which makes April a happy time of the year. If April doesn’t float your boat the way it should, here are some simple tips to make next year better.
All Incomes Are Not The Same
While people may feel awfully proud of savings accounts that pay 3.35%, they have to realize that the generated interest income is fully taxable. For many, a return of 3.35% actually drops down to the 2.35% after taxation (assuming a 30% tax rate). Dividends and capital gains are taxed at lower rates than interest income, but involve the risk and volatility of the stock market. (For all the messiness that is the stock market, the TSX is down just 3% year-to-date.) Since only half of capital gains accrued in a year are taxable, a stock that gains 2.75% will after taxation match the 2.35% return of a savings account.
Sure, calculating this stuff might make your skin crawl, but letting your money sit in the bank earning just over inflation is even scarier. Although investing does incur some risk, considering the amount of research people are willing to do before purchasing a car, an iPod, or new shoes—things that depreciate immediately. A little legwork is worth it, no?
Debt Is Okay
To start: credit card debt is not okay—that stuff’s nasty! However, debt shouldn’t be a four-letter word. If you’re short on your RRSP contribution, a debt at prime rate or close to that can be the smarter choice. For example, if you have $5,000 of available contribution room on your RRSP, taking a loan out at 6% will work to your advantage. You’d get $1,500 back in income tax savings, which brings the loan down to $3,500. While the $5,000 accrues in the RRSP, the $3,500 loan can be repaid within a year in manageable chunks of less than $325 a month. Of course, it all depends on your savings style: taking out a loan and then justifying overspending because you’re now “saving” is a no-no.
Points Are Not Taxable
While only indirectly related to income taxes, it should be note that points and incentives are not taxed. If you’re saving up a backlog of points, now might be the time to spend them. Points don’t increase in value with time (in fact, retailers tend to raise the cost of rewards with time), but your money can. After redeeming your points, take the money you would have spent and throw it into your RRSP (and score income tax savings to boot). It’s win-win: you’ll get a purchase and also get to save your hard-earned cash.
File For Free
There are two ways to file for free online. First, QuickTax and Ufile provide free filing services for those with incomes below $20,000. Second, if you’re a part-time, full-time, or continuing education student, then you’re part of the Canadian Federation of Students, which has partnered with Ufile to have all students file their taxes online for free. If you’re not a student, that’s easier to fix than you think.
Across Toronto, universities and colleges are offering continuing education classes that have made strides in becoming relevant and useful. While paying $500 for a class is a hard pill to swallow, most people don’t realize that the government provides an educational tax credit for some continuing education classes. The tuition fee is written off against your income in the 15% tax bracket and you also get a monthly deduction and a textbook tax credit for the months you’re in class. (Don’t randomly choose classes though. There are certain requirements for a course to qualify for the tax credits.) You can get back up to half of your tuition back in tax savings.
Now, that’s some educated spending.