Tax time 2015: Are instant tax refunds worth the cost?

It's a familiar scene at tax preparation services across the country. A client is told they're entitled to a refund and that they should get their money in a few weeks.

Then they learn they have the option of getting it right away. That same day, in fact — usually by cheque or a reloadable prepaid credit card but occasionally in cash. 

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It's a deal that 792,259 Canadians took in 2014, according to the Canada Revenue Agency.

But it comes with a catch — a fee that can be as high as 15 per cent of the refund.

Tax discounting

Tax discounting, as it's called, has become a major revenue generator at tax preparation firms in Canada.

At H&R Block, 583,000 clients signed up for instant refunds in 2014 — about 22 per cent of the 2.64 million returns the company processed. At the No. 2 tax preparation chain in Canada, Liberty Tax Service, instant refunds also made up about 22.5 per cent of returns. But it's a part of the tax preparation business that's been decreasing in recent years as electronic filing and deposits have shortened CRA's turnaround time.

"When it (tax discounting) was implemented in '85, it (the CRA refund) was a cheque in the mail, and back then, returns were done on paper so your refund could take eight to 10 weeks. Now, you can get it in as little time as seven to 14 days," said John Dobbs, Liberty's director of Canadian operations.

In Quebec, instant cash back is valid only on federal portion of tax returns.

CRA refunds by the numbers — tax year 2013

• Total refunds paid out: $28,068,337,525
• Average refund: $1,696
• Percentage of returns with refund: 58.47%
• Source: Canada Revenue Agency

The Tax Rebate Discounting Act of 1985 spells out that discounters are allowed to charge no more than 15 per cent on the first $300 of the refund and five per cent of anything above that. That hasn't changed in 30 years.

So, those getting a $300 refund would be charged $45 to get instant access to their money. A $1,000 refund would attract a fee of $80. A $1,696 refund — the average refund in the 2013 year, according to the CRA  — would result in a fee of about $115.

How much will I get?

CRA refund: $1,600  Fee: $110  Instant refund: $1,490

CRA refund: $1,000  Fee: $80  Instant refund: $920

CRA refund: $500  Fee: $55   Instant refund: $445

CRA refund: $200  Fee: $30  Instant refund: $170

Who agrees to pay $115 to get their tax refund instantly, given that the CRA can process and deliver a refund in as little as two weeks?

By the same token, why don't people do their own taxes or, if they're eligible, use free or inexpensive online tax programs or the services of one of the many free income tax clinics offered by community centres or accounting volunteers?

Those who work in the field say there are several answers to these questions. For one, they say the income tax return isn't an easy form to negotiate for many Canadians. A 2013 survey commissioned by a tax software company found that among the majority of people who didn't like the process of filing their taxes, the main reason cited was that people found it confusing. 

But the other reason is more of a pocketbook one: filing yourself or going to a free tax clinic means having to wait for your money. To get an instant refund, you have to pay a tax preparation service that offers discounting.

"Cash Back is still a great option for people who do not want to wait or when direct deposit is not an option" said Caroline Battista, senior tax analyst with H&R Block Canada.

Instant cash

The big tax discounters acknowledge that many of the people who've taken advantage of instant refunds need the money right away.

It's a misconception that it's just poor people [who use discounters].- Cleo Hamel, H&R Block

"Sometimes, it's a case of, 'If I don't get an instant refund, I don't make my rent'," says Cleo Hamel, a senior tax analyst at H&R Block in Calgary.

But she also says that those who choose the instant refund route do so for a wide range of reasons — they are paying back an RRSP loan, for example, or going on a trip, or simply want cash in their pocket right away.

"I think it's a misconception that it's just poor people," Hamel said.

The fine print

Discounters typically won't give instant refunds if:

• The refund is less than $75 to $100.
• The client is bankrupt.
• The client is self-employed.
• The client hasn't filed a tax return before.
• The client is filing a first-time disability claim.

And while $115 does seem to be a hefty charge for what can amount to a two-week loan of $1,581 (a $1,696 refund less the fee), the discounters point out that the fee does include the cost of preparing the return. 

Liberty Tax Service, like the other tax discounters, discounts a $300 refund by $45, but that includes the cost to prepare and file the return. The client walks out with $255 that day, and the $45 is less than most firms charge just to prepare a return.

"Some people know that it's cheaper to do instant refund than it is to pay a tax prep fee, and they will use it," Dobbs said.

'When you're desperate'

The tax refund has become a big part of the income stream for many low-income Canadians. Many tax credits are distributed through the tax system. And it's the least well-off who are eligible for a lot of those credits.

When you're desperate, 15 days can make a big difference.- Rick Eagan, St. Christopher House

Low-income Canadians can get their tax returns prepared for free at the many free income tax clinics set up across the country during tax season. But because the clinics can't give instant refunds, it can be a tough sell to have people wait a couple of weeks to get all their money.

"We try to tell them that they don't need to pay $40 or $50 to get their taxes prepared, they can get it done here for free," says Viji Naguleswaran, a community financial worker at St. Christopher House, which caters to lower-income residents in Toronto.

Still, it often comes down to personal circumstances. Are these people willing to give up some of that precious refund to get their hands on money now?

"The issue is cash flow," says Rick Eagan, community development co-ordinator at St. Christopher House. "When you're desperate, 15 days can make a big difference."