Latest / The Chiro Money Show / 031 | Tax Refunds, RRSPs, and the Plan Most Canadians Don't Have
Transcript
- Chris: Welcome back to the Chiro Money Show, where we're helping chiropractors make better financial decisions so they can build stability in their finances and a lifestyle that they love. We're your hosts, Chris Scheele and Scott Campbell, financial planners with Align Wealth. Matching. Yeah, we're matching financial planners at Align Wealth. Scott: We're twins today, Chris. financial planners yes if you're watching on YouTube Chris and I have not intentionally kind of you grab the same hat because we hopped on here with the same sweater Chris: Yep. I was going to put a hat on and then when I saw we had the same sweater I thought, why go all in here? ⁓ This our uniform, our uniform for today, ⁓ Yep. Scott: We might as well. Yeah. Today's uniform, for sure. We attended the same conference and got the same swag. So we are. Yeah, a good sweater though. Chris: But are we gonna a matching outfit for our high rocks doubles race? That's the question that I hear everyone is wondering. Scott: Yeah. My wife was asking me this morning, actually, and I said, probably black shorts and backwards hat. Chris: Wow. Yeah, should probably get a matching hat or something. Scott: Probably gonna be the same one. matching hats. We could do that. are opposed to matching outfits. I think that's the next level kind of that us in the very much a bro, high rocks bro category. I don't know if we want to be there. Chris: Yeah. No, we're not high rocks bros. We're finance bros. ⁓ yeah. yeah. ⁓ Real good. Yup. All right. No no one knows what high rocks is and no one cares. Let's move on Scott. ⁓ Scott: But we're gonna throw down though. We're gonna have a good time. Yeah. We're going for another podium, for sure. It's true. Yeah. No one cares. And either you don't care or you have no idea what hyrox is. And maybe that should stay that way. Chris: Yeah, yeah, yeah, don't go down the rabbit hole. You probably don't want to. If you're listening to this now, you don't want to go there. Don't Google high rocks, H-Y-R-O-X, don't do it. don't let Scott or I convince you to come out for a workout. ⁓ Scott: We might do that. I think we've already done that for a few of our clients. I know I have. Chris: Exactly. All right, man, what are we talking about today? Scott: It's that time of year. Individuals across Canada are, if they're in a position of getting a refund from the CRA, tax refund, now's the time of year that they're probably getting that deposit into their bank account or they're collecting their check in the mail. I know I got one myself yesterday in the mail. I don't know why I don't have a direct deposit set up, but I don't. Yeah. And our family is in the process of... Chris: In the mail? You don't have direct deposit? What's wrong with you? Get that set up, Scott: buying a truck so we uh... it came in handy to have some extra cash for the truck purchase so Chris: ⁓ I see. So when we look at those stats of what people are using their money for we know what camp you're in this year. I'm sure that's not every year, but... Scott: Yeah, for sure. Not following the typical trend. No, it's not every year. It might actually just be temporary, but we'll get into it. So, why? ⁓ Yeah. of all, interesting statistic. We were just reading a study from TD this morning that apparently close to 80 % of Canadians across the country are expecting a tax refund from the CRA. Chris: Yeah. Scott: after filing the taxes. Average tax refund is apparently somewhere around the tune of $2,000. like that has trended upward in terms of the amount of Canadians over the years getting a tax refund. So, it's interesting. Chris: Yeah. Yeah, it is interesting. thing that, ⁓ first place I like to start with is, it's necessarily a good thing to be getting a tax refund. What it is that you've overpaid your taxes throughout the year. ⁓ So you've the CRA money and now you're getting back after you've filed your taxes. ⁓ Scott: Yep. Yeah, a tax-free loan. Like if you were use that number, if the average refund is $2,000 for the average Canadian, it's the equivalent of wiring the CRA $167 a month to be put into a saves account that earns you 0 % and they're going to send it back to you the next April. Chris: Hmm. Yeah. So much more, you know, just from the numbers perspective, it would be much more optimal if you had saved that $167 or like been paid out that $167 a month over the course of the 12 month year and saved and invested or use that how you, how you would have, that's the more optimal route. But there is such a behavioral element to tax refunds that it's not even crazy. Like I think this is one of the biggest opportunities and yeah, it's. It's just mind blowing how people of anchor to these different behavioral. elements when it comes to a tax refund where it like feels like it's free money ⁓ lot of ways. It feels like you know, it's unexpected We don't know how much we're gonna get so when we get it it can be surprising in a positive or a negative way ⁓ that can lead to significantly different outcomes Compared if you had ⁓ received money throughout the year ⁓ Scott: Mm-hmm. Yep. why don't you share with our listeners first and foremost of ⁓ was the most common reason as to why we're receiving a refund. Chris: Why we're receiving a refund? mean, we've in taxes, so ⁓ probably most... Probably the biggest reason is with regards to RSPs, right? We make a contribution to our registered retirement savings plan and that acts as a deduction. it our income by the amount we contribute over the year. And when we claim that on our tax return, income is reassessed at the new lower amount and the tax that we had paid ⁓ returned to us. so let's walk through an example here. Let's say in the first example, let's just say everyone's earning $100,000 just for real easy math so that we don't get our quick math wrong here. And they make a $10,000 RSP contribution that is essentially lowering their income to $90,000 on the year. And the tax that they would have paid on that $10,000 difference between 100 and 90,000 is, is the refund that's going to be coming their way approximately. There's other factors to consider, but that's what we have. ⁓ Scott: Yeah. I'm Roxette, yeah. Let's assume it's salary. So if it's a salary income of a hundred thousand dollars, let's assume that you maybe have a corporation set up or yeah, you have a corporation set up. You're paying yourself a hundred thousand dollars salary, which, should mean that you've had payroll deductions for federal and corporate taxes, along with your CPP being made on a monthly basis by your employer. And like, you could be the employer for yourself, of course. And if you've been, if you made $10,000 of say monthly contributions to your RSP throughout the year, you're going to see your taxable income. reduced from 100,000 down to 90,000. That probably puts you into what? Probably about a 30 % marginal tax rate somewhere in that tune. Itch. So that's just like rough numbers. You're roughly getting about $10,000 deduction. You're getting about $3,000 refund those contributions that you made. Chris: Yeah, somewhere around there. 3,000. Yeah, so that's one way that if someone was making regular monthly contributions at that salary rate, approximately ⁓ could happen. Let's go through another example. Let's say the same individual ⁓ that they were gonna continually always ⁓ make that Scott: Yep. Chris: know, $10,000 RSP contribution on a monthly pack of pre-authorized contribution, right? If they wanted to do that, they could complete a CRA form request that the tax withheld ⁓ from source deductions on their payroll is reduced based on factoring in that RSP contribution. So now, instead of paying higher source deductions on every payroll run throughout the year, they're actually paying lower source deduction. They net more money all else equal, when they go to file their taxes, they would have zero tax refund. Scott: Correct. Yeah. So a little detail on there that Chris is referring to the tax form the T1213. form that you'd have to file with the CRA. This is something that you'd have to do on an annual basis. It's not something that you just said and forget and it's in place year over year. believe you have to provide documentation of like your ⁓ contribution agreement into your RRSP. And if we're using that example, if you're typically getting a $3,000 refund, ⁓ it's like your net income or your net cashflow is going to increase by $3,000 divided by 12, whatever that amount comes out to. to your net income. you essentially now have not made that tax free or interest free loan to the CRA and now you have that $3,000 obviously spread out over the 12 months in your pocket that you can make a decision with in terms of is that going towards your overall cash flow plan in terms of how you're spending money? Is it going towards you know maybe further contributing to your TFSA for example? Obviously there's a lot of circumstances where that you do as you wish with that extra cash flow but the point being is that you're not making that interest free loan to the CRA and waiting for your $3,000 to come April the following year. ⁓ Chris: Yeah, for sure. One other way you could potentially tackle that, if you, you know, if we're trying to avoid that interest-free loan to the government or essentially overpaying on your taxes is we could do a lump sum RRSP contribution at year end. And so with RSPs, you're afforded the 60 day window in the first 60 days of the next calendar year to make a contribution that you can choose to apply to the previous tax year or the current tax year. So like, let's just say for 2026, from January 1 to the end of February or March 2, whatever the next business day is in that 60 day window, you can make an RSP contribution and apply it to your 2025 tax year. let's say the same scenario, client had $100,000 payroll they had $10,000 set aside that they contributed on February 28th, my birthday for everyone that cares, and they make that contribution as soon as they file their taxes, which could be, you know, really could be as soon as ⁓ Scott: You Chris: April 15th, April 10th, depending on, you know, assuming you have all the tax forms needed, could then get that refund within several of making that contribution. So you're loaning ⁓ money the for a shorter period of time. but there are some inherent downfalls with that lump sum. You know, you need the discipline to save the $10,000 lump sum to make the contribution it's not automated. So you have to actually have to take action to make that. So not sure if that is a viable solution, but it's also, it's just one that is worth noting. ⁓ Scott: Hmm. Mm-hmm. maybe it's alright. ⁓ you like have for... for whatever reason you may be coming to some extra cash during that timeframe or not, or can make a one-time larger lump sum contribution to my RRSP versus scrambling out. I've always hated the term RRSP season that is kind of known in the financial advisory space. it. I won't call it that. Like RRSP season in the financial advisory space is essentially that ⁓ January, timeframe where everyone's scrambling to make an RRSP contribution before the deadline. ⁓ from our viewpoint, like Chris is saying, our preference would be like, let's have a, a financial and planning place where we have planned out what we want to be doing in terms of RSP contributions versus TFSA versus corporate investing or whatever combination of that. And we plan what involves a regular monthly contribution to these accounts versus scrambling at the end of February saying, hey, well have an extra 10,000, I'm gonna throw that into my RSP. That's very reactionary. Yeah, is it better than not doing it at all? Of course, but you know, that could look very different. year over year. Chris: Yeah, good point. If making your plan for contributing to your RSPs in January and February of each year, I think failing to plan. You don't really a plan in place if that's ⁓ your default, is to react. It's better to be proactive. Scott: Yeah. On that, yes, and on that. that note one thing that we also aren't huge fans of seeing when it comes to RRSP season and being reactive is that for those that are on a primary dividend based income strategy from their corporation where they've been drawing income throughout say all of 2025 and whether maybe they've been making some tax installments maybe they haven't but they've been told by their accountant to say hey you have a tax bill coming up here due based on how much you've drawn out of your corporation you haven't remitted enough in But if you make a RSP contribution of X amount that's going to either eliminate your tax bill owing in April or it'll lower by X amount and Like I guess that's okay, but at the same time it's You're you've already spent the tax like it's it's probably gone to lifestyle spending versus like what we're gonna talk about next in terms of like if you do in fact get a refund whether it's $2,000 $5,000 $10,000 if that is the case because you've made a lump sum or contributions throughout the year What are things that we should be doing with that refund that event? Chris: I mean, I think ⁓ first default comes down to goals. Like, what are we for? One of the simplest and easiest approaches to that is we have a refund. It was money we weren't necessarily planning for or needing to use for consumption. Let's bring that back into investments. So let's say in this scenario, the $100,000 salary earner contributes $10,000 to the RSP, receives an approximately $3,000 tax refund, takes that $3,000 refund and plugs that back into their RRSP, assuming they have the contribution room to do so. then lowering their income for the next calendar year and ⁓ with tax savings and then are also getting that invested in a tax-deferred, tax-advantaged investment account. huge opportunity there. ⁓ If RSP is not available, putting that money into the TFSA, Free Savings Account would probably be ⁓ great place to consider. ⁓ even maybe an RESP, ⁓ Kids Education Savings Plan, if you ⁓ children. Scott: Mm-hmm. For sure, all those are great options, especially if you're the higher income earner getting a large RRSP tax refund and maybe have a lower income earning spouse where maybe it doesn't necessarily make sense to put it into their RRSP, maybe it's more advantageous to put it into their tax-free savings account, of different options. Of course, if you are hanging around with any sort of really high interest debt, maybe that's a good opportunity to knock that down well or eliminate that before doing some further investing. Chris: Should we touch on some of the stats here, Scott? Scott: Yeah, for sure. I think what's interesting that I found this morning is here's where when I did some research on in terms of like what's the data showing in terms of what are people doing with with tax refunds these days. I think from my experience over the last 10, 15 years is that I often hear, before we get into some of these stats, I often hear sometimes from retirees or articles or just the kind of the industry noises that once you retire and you might start drawing down on your RRSP that they start griping about the taxes that you're having to pay when you withdraw from your RRSP. From my point of view, almost seems like we've completely forgotten that at one point in time, you know, if we go back to our example, you had $100,000 salary, you made a $10,000 contribution, you got $3,000 back in your pocket that you can make a decision in terms of what you do with that $3,000. Because you deferred that $3,000 of tax potentially for the next 10, 20 or 30 years until you need to withdraw it from your RSP. So the question comes down to what did you do with that $3,000 refund? Did that go to lifestyle spending? Did that kind of like, where did that go? But if you if you super if you kind of supercharge that you have 3000 now in your RSP deferred for the next 10, 20, 30 years. If you took that $3,000 and you reinvested that now you have more money working in the market, growing your nest egg even larger, right? But think people often forget about like, ⁓ I don't know what to do with those refunds. A lot of times it kind of has gone to to kind of discretionary lifestyle spending, I think in the past. But what was really interesting that I found in some of these more recent studies is that I was reading one from TD is that the younger generation, like Gen Z in particular, it sounds like they're doing a much better job of making a I think over half of them are planning to save or invest their refund. Another 25 % or so are making the decision to use that to pay down debt. Where I think in the past, that was a lot more lean like that leaned more towards like funding a vacation or just lifestyle spending. I thought that was really interesting. Chris: Yeah, very interesting how that trend is changing. Yeah. I gotta go back to the comment on like the retirees or like the people that are drawing down on their RSPs now in retirement and like complaining about the taxation of that. Scott: Mm-hmm. Chris: Because it's so common like there's so many boomers. It's just you look at statistics There's so many boomers that are retiring and starting to do just that we're hearing from their children You ⁓ people age the Millennials and ⁓ and Gen or I don't know whatever the Millennium generation and younger ⁓ that parents ⁓ hate now ⁓ because they Scott: Mmm. Chris: forgot that there's going to be tax owing when they go to withdraw from them in retirement or they didn't understand that. ⁓ just such a frustration every time we hear it. It's just, again, kind of going back to like this contribution to the RRSP and like the knee jerk reactions and, you ⁓ taking action RRSP season only. Scott: Hmm. Chris: I hate hearing this from boomers that the RSPs are bad and they're telling their kids that. RSPs are not bad. You have failed to make a plan for how to withdraw from it in the most tax advantage, tax considerations like how you say that Scott? Scott: Efficient. Yeah, it's just a reactive plan. Like there was no intention likely in terms of how like growing their RSP and what they were doing with their tax deferral, which is really what it comes down to. Like an RSP is a tax deferral vehicle. What are they doing with the deferred taxes over that, you know? Chris: Yeah, there's no plan. Right, but that's all gone and spent. they spent it or used it and invested it, ⁓ think is ⁓ of irrelevant the point I'm trying to make. When you and pull $20,000 out of your RSP in retirement, there is going to be a tax bill associated with that. It should not come as a to anyone. It should be something you plan for. Scott: Yeah. Chris: You can't just react and then tell your kids that RRSP's are bad because you have to pay tax in retirement. was the deal from the outset. If you didn't understand that, that's on you. Let's ⁓ Scott: And obviously the ideal there being that during your during your maybe 20 year career as a chiropractor at your highest income earning years that you've been making an RSP contribution at a fairly high marginal tax rate because you've been making, you know, hundred, hundred fifty, two hundred thousand dollars plus a year and getting a pretty sizable tax refund with good planning, with having, we've talked about this in previous episodes, like when you get to retirement and you're making decisions on how you fund your retirement, we want you to see you in a position where you have these different levers to pull to ultimately put you into a marginal tax rate that's lower than the marginal tax rate that you were in when you were earning earning salary making those contributions during your working years. So if you're contributing in a marginal tax rate of 30 and you're getting a $3,000 refund, maybe ideally when it comes to retirement, you're at a 25 % or 20 % marginal tax rate. And that's that's where the advantage you've had a tax deferral for decades, and then you're taking it out ideally at a lower tax rate. Worst case scenario, like obviously you might be in a in a higher tax pack, but I think that happens fairly, that doesn't happen Chris: Yeah. Scott: too often, especially with good planning. If you're at the same marginal tax rate in retirement, I would say you're probably in a fairly strong financial position to warrant that. Chris: Yeah, sure. Yeah, and it still probably was a good outcome because you had the tax deferral, the tax deferred growth on the investments for 30 years maybe. Still a good outcome even if you have the same marginal tax rate. think focusing on the marginal tax rates too much is a downside this whole ⁓ RRSP planning thing. Scott: Yeah. Yeah, for sure. Yep. Chris: accountants even clients get too fixated on marginal tax rates ⁓ lose focus on what the is that we're trying to solve. Which is your tax in your working years and having a plan to also limit it in your retirement years as much as possible. Scott: Yeah, absolutely. Yeah. All right. We've hit on a lot, Chris. What would you, if we were to kind of have a few takeaways here, what do we want to leave our listeners with in terms of thinking about what to do with their tax refund, thinking about the current year that we're in in terms of, you know, if you just got a large tax refund, is there something that we want to consider here in the current tax year, 2026, to plan for the future? Chris: Yeah, think it ⁓ back to having a plan and ideally you have a plan before the refund lands in your bank account. ⁓ me, I would default back to my personal cash flow plan. ⁓ okay, in my personal cash flow plan, ⁓ allocating X dollars these goals I have. do I to supercharge any of these goals? Whether that is a vacation goal, vacation savings goal, ⁓ kids education, or my retirement, or whatever else, right? you gave example of ⁓ allocating ⁓ your refund year to your new truck purchase. great. Probably went through a similar framework to looking through ⁓ what I put this towards and that was ⁓ the that stood out as the priority. ⁓ Scott: Mm-hmm. Yeah. Chris: For me, our goal this year, our primary goal was saving up for our moving costs and like that whole transition of the move that we're going through. So that's where ours got allocated to. we look ⁓ yeah, we got to that ⁓ by looking through our cashflow plan and all the different priorities that we ⁓ money to on a monthly basis and prioritizing what was most ⁓ and most of our refund into that. And then... Scott: Mm-hmm. Chris: going down the list basically. Scott: Yeah, for sure. Yep. action items, if you are making regular, ⁓ make the assumption here, if you're making a regular. ⁓ draw from your corporation the form of a salary income from your corporation and you're making monthly forbidances but ⁓ addition to that you're making regular monthly contributions to your RSP especially sizable ones if you're making like a ⁓ four five hundred plus RSP contribution on a monthly basis ⁓ may be worth considering talking to your accountant about filing that tax form with the CRA so you can lower your tax remittances so you have that net cash flow working for you in the month that you receive it versus waiting a year. really do that if you're kind of random or you know maybe you're making monthly contributions but maybe you make some sporadic lump sum contributions as well to your RSP throughout the year there's no way of kind of avoiding or paying less tax at that time through your ⁓ tax installment so you will inherently get that refund ⁓ following year but like Chris like like you're saying let's have a plan around that is it going towards a specific goal or objective was the plan always to reinvest that into back into the RSP or into your tax-free savings account. all about intention at the end of the day versus just being, ⁓ great, we got some money here, let's just put it into our account. if it just gets absorbed into lifestyle, that may be the less than ideal outcome. Chris: for sure. And I think that's often the case, right? you get your tax refund electronically, by check, Scott, ⁓ deposited into your bank account. ⁓ if you're not very quick to move ⁓ to different account, it can get ⁓ spent ⁓ easily. you don't even know what you spent it on ⁓ because life happens, right? But if you a separate, maybe savings account towards one of these priorities or goals that you can put aside into, you can clearly track have a bit more accountability over utilizing ⁓ tax ⁓ in more appropriate way. Scott: All right, anything else you want to touch on or should we leave it there? Chris: So leave her there for the day. Scott: Okay, well thanks for tuning in as always and we'll see you all again next week.