Tips from Sarah & Cyndy – Tax Time - Green or Red?
By Sarah Chisholm, Financial Advisor
O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
The deadline for filing your personal 2021 taxes has come and gone. Did you end up in the green or in the red? What will you do with that extra cash or how will you pay that CRA bill? With tax season still fresh in your mind, let’s take a step back to review 2021 and plan for 2022.
For those lucky enough to receive a refund – have you considered what to do with it? The first questions to ask are:
1. Do I have credit card balances or high interest debt to pay off?
2. Do I have an emergency fund available? (Ideally enough to cover 3 months of expenses)
If the answer is yes to either of these questions, that is where your funds should go. Neither of these is flashy or fun, but paying off consumer debt and building an emergency fund will help set you up for success in 2022.
If you have these two covered, then you can begin exploring other options such as:
1. Discretionary purchases - the latest phone, new clothes, family trips.
2. Retirement investments - RRSP or TFSA are great options to build your wealth.
3. Lump sum payments on your mortgage – can you pay off your mortgage before retirement?
4. Home renovations – is now the time to build a deck or put in a backsplash in the kitchen?
5. Deposit funds to a child’s registered education savings plan – if you are within the limits, you will receive the 20% education savings grant.
The answer may be to divide the refund and spread it across a few goals. A trusted Financial Advisor can review how each option fits into your overall financial strategy.
A word of caution – if your refund was excessive, perhaps you need to re-assess what withholding tax strategies you are using. Remember a tax refund means that the federal government has had this extra money for the last 12 months – rather than in your pocket.
What if you owe the CRA? Was this tax triggered by your regular income or was there an extraordinary transaction in 2021? For example, did you sell a rental property and had to pay capital gains taxes? Did you start receiving Canada Pension Plan or Old Age Security in 2021 but did not request withholding taxes? If you were in the red for 2021, make sure you pay the bill. The CRA begins charging 5% interest right away.
Stepping back to review your 2021 taxes can help set you on a better course for 2022. Should you increase your RRSP contributions or increase the withholding taxes on your registered retirement income fund? Did you spend two days sorting through receipts and bills before you could even start filing your taxes? Perhaps in 2022 you could work on a monthly reconciliation, or take a more active approach to filing important documents like charitable donation receipts and health care expenses in a special tax file. If historically you always seem to owe at tax time, now is the year to start setting aside money monthly for taxes. This way you will be prepared for the next bill.
2022 is a fresh start, enjoy.
Sarah Chisholm is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at 613.258.1997 or visit ofarrellwealth.com to discuss your circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
