Tax season is upon us, and for many Canadians, it is a time of gathering documents, filling out forms, and hoping for a sizable tax refund. In recent years, an option has emerged that promises to expedite this process: instant tax refunds. This is where tax preparation companies offer a cash back option where you can receive funds immediately after filing your tax return. You have likely seen H&R Block offering this instant tax refund, although many other smaller companies have followed suit and are offering the same. But before you jump at the opportunity for instant cash, it is essential to understand what these services entail and whether or not they are truly worth it.
What is an instant tax refund?
An instant tax refund, also known as a rapid refund or instant cash back, is a service offered by some tax preparation firms. These firms promise to provide you with a portion of your expected tax refund immediately, often within hours of filing your taxes. They typically charge a fee for this service, which is deducted from your refund. It simply speeds up the rate at which you receive your tax refund, instead of having to wait for the Canada Revenue Agency (CRA) to send you the funds.
How does an instant tax refund work?
When you file your taxes with a tax preparation firm offering an instant tax refund, they calculate your refund and offer you a portion of it upfront. As well as putting your T4 and other related tax information into their software to prepare your return, you will be given the option of getting an instant refund or waiting for it from the CRA. If you opt for an instant tax refund, your tax refund will be assigned to whoever is filing your taxes and you will receive instant cash owed from your refund. When the CRA finalizes your return, they will then send your tax refund to the company who filed your taxes on your behalf. While this is helpful if you want your tax refund immediately, there is a catch – you will not receive the full amount of the refund. You pay a fee to receive an instant tax refund.
What are the advantages of an instant tax refund?
Here are the primary benefits of instant tax refunds:
- Immediate funds. The key advantage of an instant tax refund is the ability to access your money quickly. If you urgently need cash – say you have a bill or unexpected expense to cover – this can be incredibly appealing.
- Convenience. Instant tax refunds often offer quick and hassle-free processes. If you have a busy schedule or prefer to avoid the complexities of filing taxes yourself, this convenience can be worth the extra cost.
- No credit check. Unlike other types of loan, instant tax refunds do not require a credit check, which may be a good option for you if you have a poor credit score.
What are the disadvantages of an instant tax refund?
While instant tax refunds do offer some pros, there are cons too:
- High fees. One of the most significant drawbacks of instant tax refunds is the fees associated with the service. These fees can be substantial and may eat into a significant portion of your refund. You should carefully consider whether the convenience of instant cash is worth the cost.
- Less funds. You are paying a fee to borrow your own money in essence, which means you will receive less overall.
- Potential debt. If your actual tax refund is less than estimated by whoever prepared your taxes, you could end up owing them money.
- Risk of errors. Because instant tax refund firms expedite the process, there is a higher risk of errors in your tax return. Mistakes could result in delays or even penalties from the CRA, which can be both financially costly and stressful.
- No guarantee of a faster refund. Although you may be able to receive your tax refund instantly, it does not always guarantee a faster refund from the CRA. In some instances, your refund might still take the same amount of time to process as it would if you filed with the CRA directly.
What are the fees for an instant tax refund?
Instant tax refund fees are set by the Federal Government of Canada. It is 15% for the first $300 of your refund, and then 5% on the rest. Let us say you are owed $500. This would mean you are charged $45 on the first $300, and $10 for the remainder. Whoever has prepared your taxes would then keep $55 in fees, and you would be left with $445 of your return. It is therefore important to consider whether or not the fee is worth it in order to receive an early refund. You may also want to think about how long it could otherwise take for you to receive your tax fund from the CRA.
Is an instant tax refund worth it?
Whether or not an instant tax refund is worth it depends on your unique circumstances. If you urgently need cash and are prepared to pay the fees to receive your refund quicker, it might be a good option for you. If, however, you are happy to wait for your refund and want to ensure you receive the maximum amount, it may well be better to file directly with the CRA or through a tax preparation service with lower fees. It is also dependent on the fee you would owe. If you are owed a large tax refund, the fee will be proportionate, and it may be better to try and wait to maximize your refund. You should also consider the CRA’s processing time. If you file electronically, the CRA aims to process your return within two weeks, or eight weeks if you file a paper return. This might not be as long as you think, and you can always check the status of your refund via My Account on the CRA website. If you think you can wait two weeks for your tax refund, an instant tax refund probably is not worth it for you.
What are some alternatives to an instant tax refund?
If you do not fancy losing some of your tax refund, thankfully there are some other alternatives that may help to tide you over:
- Savings. You might wish to use any savings you have as a temporary buffer until you receive your tax refund. It is important, however, to make sure you top up your funds when you receive your tax refund.
- Low-interest credit. Using a low-interest credit card may help to cover your short-term needs – just ensure to repay your balance in full and on time when you receive your tax refund.
- Execute a budget. Instead of borrowing more money, you may want to try reducing your spending temporarily wherever you can, or delaying some purchases until you receive your tax refund.
Instant tax refunds can be tempting, especially if you are in need of quick cash. It is crucial, however, to weigh up the benefits against the costs and risks before deciding whether or not to go ahead. For many Canadians, the traditional route of filing taxes directly with the CRA or through a reputable tax preparer remains the most financially viable option. If you have any concerns around your tax debt or any other debts, book a free consultation with a reputable Licensed Insolvency Trustee at Spergel.
