Homo economicus is a theory put forth by economists and philosophers that describes a being who is "cold and calculating, worries only about them self, and pursues whatever course brings them the greatest material advantage"1. In a perfect economic world, everyone would be a homo economicus and would make rational decisions that would result in optimal financial wealth. Getting a tax return is not optimal. A tax return is composed of funds that are returned, not given, by the government to the tax payer.
Take this example: imagine Jack Shephard makes $100,000 a year in British Columbia in 2018 and their salary has taxes deducted at source. Estimating the combined marginal tax rates in BC, Jack can expect to pay 22.53% of his 2018 income in taxes, so they would have had $22,530 withheld at source by their employer. In January of 2019, before the RRSP deadline, Jack decides to make a $20,000 RRSP contribution and claim the deduction on their 2018 taxes. The RRSP contribution is pre-tax money, which means that Jack receives a deduction and their taxable income is reduced by the amount of the contribution. After their contribution, Jack's income is now $80,000 and they now owe the government $15,798 for their 2018 taxes. However, taxes have been withheld at source already, so the government has been “collecting” 22.53% of Jack’s income already and technically has the $25,530 in hand. After Jack files their taxes, they get a cheque of $9,732 (the difference between taxes paid and taxes owed) and Jack is delighted... but should they be?
In this very simple situation, Jack has loaned the government the $9,732 throughout 2018 and had the loan "mature" in April 2019. The $9,732 is money that Jack could have been using in 2018, either as an investment or for their own personal use. Instead, the government has used Jack's money for whatever it needs it for in 2018 and not had to pay any interest to the lender, who in this case is Jack. So what should Jack have done in this situation? How can Jack behave more like a homo economicus and make a rational decision to find an optimal solution? Had Jack known that they were going to make an RRSP contribution, then they could have filed a T1213 and had less tax withheld at source which would result in a $0 tax bill for 2018. This method would have circumvented Jack giving an interest free loan to the government and they could have kept their money in hand throughout 2018. Of course, Jack could take this a step further and have $0 taxes withheld and owe the full $15,798 in April. Jack would then put their funds for the tax liability into a high interest savings account to receive some income before paying the liability in April. This method comes with risk and the additional stress of a large bill, so it may not be in line with Jack’s goals, but everyone is different.
There are a variety of ways to lower taxable income and receive a tax return. Jack could have some tax credits from moving expenses or could have made a sizable charitable contribution in 2018 to name a few. All of these deductions and non-refundable tax credits could have been disclosed on the T1213 form and Jack could have avoided being used by the government as an interest free lender. Of course, in the real world being a homo economicus is rare due to the irrational tendencies of people. However, Jack and other Canadians like Jack can use sound financial planning and seek tax advice to optimize their wealth to help them reach their financial goals. Speak to your financial advisor about how you can optimize your income and plan your finances to be optimal for your own personal goals.
Zak, Paul J. (2010). Moral Markets: The Critical Role of Values in the Economy. Princeton University Press. p. 158