What to do with your tax refund?

What to do with your Tax Refund

A tax refund can seem like “free money”, but that doesn’t mean you should spend it carelessly. Instead, think about your personal financial situation, determine your priorities and give your money a purpose. Here are some ideas to get your wheels turning.

Pay off debt

If you have high-interest-rate debt, like credit-card debt, it should be an easy decision to use your tax refund to pay it down. If your only outstanding debt is your mortgage, the decision may not be so simple. You could be better off putting the money to use elsewhere.

Boost your retirement nest egg

Do you have contribution room in your RRSP? If so, you could add to your retirement savings. This will result in a bigger refund the following year. Or you could contribute to your TFSA and grow your refund tax free. Apart from paying off bad debt, boosting your retirement nest egg could be your best option if you haven’t yet reached your saving goal.

Create or add to your emergency fund

Many experts say you should keep six to eight months’ worth of savings in an easily accessible interest-bearing account in case of emergency. If you don’t have an emergency fund, any surprise event could throw you into a debt spiral.

Invest in your children’s education

If you’re a parent (or grandparent, aunt, uncle, etc.) a great way to use your refund is to contribute to your child’s RESP. Each year, courtesy of the Canada Education Savings Grant, you’ll get an extra 20% added to your account on the first $2,500 you save.

Invest in yourself through continuing education or training for a new career

Professional development can make the difference in your career. If you invest in continuing education or take that training course that will allow you to switch careers, you could see a big payoff, both in how you view your job and in your earnings.

Give money to your heirs

If you plan to leave money to a relative or close friend in your will and can afford to part with some of the funds now, consider turning your tax refund into a cash gift. By gifting the money in advance of your death, you can reduce the size of your estate at the time of your death, thereby reducing taxes and probate fees at that time. If you give a sum of money to your kids, they could pay down their mortgage, which would lower the amount of non-deductible mortgage interest they must pay each year.

Invest in homeownership

Thanks to the principal-residence deduction, your home is not subject to capital-gains tax when you sell it. Thus, it could make sense for you to put the money towards your mortgage, home improvements that will boost the value of your home or a down payment on a new home.

Invest in life insurance

If you don’t currently have coverage, your tax refund could help defray the cost of premiums on a life-insurance policy. In addition to peace of mind, life insurance can offer key tax benefits, including: tax-sheltered investment growth, tax-free payout on death of the insured and an increase in the capital dividend account (CDA) of a corporation.

Lend the money

If your spouse, partner or kids are in a lower tax bracket than you, consider lending money to them at the prescribed rate of interest, which is 1%. When the recipient then invests the cash, any income earned will be taxable in his or her hands. This is known as income splitting. As long as the recipient earns more than 1% on the investments, your tax bill will be lower overall.

Donate to a charitable cause

Use your tax refund to do good now and reduce your tax bill in the future. When you donate to a registered charity, you can receive a tax savings equal to almost half your donation, depending on your income and the province you live in.

Need Advice?

If you require assistance in developing or managing your tax plan — including implementing a sound tax-minimization strategy — contact us today or send us an email. We would be pleased to help!







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