Tax-filing season is simultaneously one of the most dreaded and most eagerly anticipated times for Canadians. On the one hand, there’s the unpleasant chore of physically filing the taxes, which you can only escape by paying an accountant a portion of your hard-earned money. On the other hand, there’s the possibility of getting a refund. Most Canadians get a portion of their withheld taxes paid back to them. The reason is that accountants like to “stay on the safe side” when doing payroll, so employees don’t end up having to pay back some of their wages.
It’s a wise practice for the employer, and it gives the worker a lump sum refund usually in the spring following the previous tax year. It’s debatable whether tax refunds are good things because you’d have a longer time period in which to invest your money if your employer withheld only what was needed. Nevertheless, it does feel nice to get a big, juicy tax refund back from the Canada Revenue Agency (CRA) after 12 months of working to earn one. In this article, I will explore how much you could get back from the CRA using Registered Retirement Savings Plan (RRSP) and other deductions.
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Up to $15,390 from RRSP contributions alone
You can get quite a bit of money back from the CRA after the end of a fiscal year for any number of reasons. Your accountant may have withheld too much. You may have had deductions and credits you didn’t know about. You may have had so many deductible expenses that you’ll have to pay no tax at all! That’s unlikely to happen, but it’s theoretically possible, especially if you’re self-employed.
To illustrate the tax-saving power of deductions and credits, we can use an old classic: the RRSP contribution. Every dollar you contribute to an RRSP reduces your tax bill by that amount times your marginal tax rate. The maximum RRSP contribution limit last year was $30,780. If you earn $250,000 a year, your marginal tax rate is likely to be 50%. So, the contribution tax break saves you $15,390!
Sweet!
What to do with the space
If you plan to lower your 2023 tax bill by making RRSP contributions, you ought to invest the money in the account. The tax refund that RRSPs trigger feels nice to receive, but in truth, it’s the tax-free compounding that makes RRSPs valuable, not getting money back from the CRA. Nevertheless, you might have a big refund coming your way, and if that’s the case, you’ve got quite the buffet of appealing dividend stocks in front of you that could potentially invest in.
Consider Fortis (TSX: FTS), for example. It’s a “Dividend King,” or a stock that has raised its dividend every year for 50 consecutive years. That kind of track record speaks for itself. It does not necessarily mean that Fortis will continue performing well in the future, but it does establish the stock as one at least worth researching further.
Will Fortis be able to keep up its dividend growth in the future? Potentially, yes. The company’s payout ratio today is 78%, which is actually on the low end for Canadian utility companies — several are paying out more in dividends than they are actually earning! Over the years, Fortis has proven itself to be a good capital allocator and a reliable dividend payer. It’s a classic RRSP stock in every way.
