Your tax refund isn’t a “gift”
Have you received a “tax refund”? It’s around this time of year that taxpayers get Notices of Assessment from the CRA. Sometimes that means a cheque. Sometimes it means a nasty tax bill. So what will you do? Cash the cheque and blow it on something right away? If it’s a call for more cash, do you pay…or do you fight?
Most people think of a tax refund as a “gift” of some sort: “Hey, the government is giving me money!” That’s wrong, of course. The government isn’t “giving” you anything that wasn’t yours in the first place. The plain fact of the matter is that getting a tax refund means you’ve paid too much tax through the year, and the government has had the use of that extra money while you haven’t. And you’ve noticed, too, that there is no “interest” attached to that tax refund either, haven’t you? No? Strange, isn’t it…when you borrow money from anyone, you inevitably have to pay it back with interest. When the government “borrows” money from you in the form of overtaxation, you receive no interest. Worse, you’ve actually lost money.
Recovering investment earnings
Now all this might seem a bit like splitting hairs, especially if the refund amount is just a few bucks. But if it’s in the hundreds or thousands, you have some cause for concern. That money could have been earning a decent investment return instead of sitting in the government’s general revenue slush fund, paying for, say, Senate housing allowances, or some such.
So when you get that tax refund, if it’s more than a few dollars, consider what you might do with it to recoup your loss of investment earnings on that money. Your best bet might be to reinvest it in something that generates a return larger than the rate of inflation over the past year. This could include:
- Paying down high-interest consumer debt, like outstanding credit card balances.
- Paying down the principal of your mortgage.
- Investing in growth investments through your Tax-Free Savings Account.
- Adding to your Registered Retirement Savings Plan, to generate a tax deduction for this year and target tax-deferred growth within the plan.
What if you owe more?
Of course, if you didn’t get a tax refund but got a demand to pay more money instead, you have an entirely different problem.
Your first step is to look closely at the Notice of Assessment and determine exactly why the CRA says you owe more. Did you miscalculate an entry? Did you make a data entry error when you filed your return? Sometimes the problem is as simple as that, and you’ll just have to swallow your embarrassment and pay up. Other times, the CRA may be disallowing tax credits or deductions. If you’re not sure what the problem is, your next step is to call the CRA to find out what the problem is. Sometimes, it can be cleared up by speaking with someone directly.
Objecting to taxes
If calling the CRA doesn’t resolve things, you may have a good reason to object to the CRA’s assessment. And, as you’d expect, there’s a form for that. It’s called the T400A Objection – Income Tax Act, or more commonly, a Notice of Objection.
If you plan to go down this route, it’s really important to note that you have only 90 days from the date the CRA mailed you your Notice of Assessment to file a Notice of Objection, whether you actually received your Assessment or not. Your Notice of Objection should include chapter and verse about why you believe the CRA’s Assessment is incorrect. That includes evidence that the CRA has made an error either in fact or in law. And yes, if this sounds as if you are considered “guilty” until you can prove your innocence, you’re right. The CRA is considered to be in the right until proven wrong, and that means you still must pay any assessed amounts or face interest on overdue amounts (at an annual 5% rate for the second quarter of 2013, which compounds daily).
In general, it makes sense to pay what the CRA says you owe, if only to avoid that penalty interest from mounting up. The reason is simple. If your Notice of Objection deals with tax deductions, GST/HST, or withholding tax, the CRA can continue to take steps to collect any balance owing, including seizing assets or garnisheeing wages. If you pay now and fight the assessment – which could take as long as a year to sort out and subsequently win – you’ll get your money back, with a little bit of interest.
Filing a Notice of Objection can be a perilous enterprise, with various time limits and conditions attached. Doing it wrong can end up costing you not only your original assessment, but also other penalties and interest. Your best course of action is seek the advice of a tax lawyer or other qualified financial or tax advisor to help you with the procedures involved.