Canadians are eagerly awaiting their tax refund or have already pocketed their it from the Canada Revenue Agency (CRA). In 2016, 65 per cent tax returns processed yield refunds with the average cheque or direct deposit from the CRA coming in at $1,650. The money will generally land in your mailbox or bank account within two weeks of filing if you sent in your return electronically, or within eight weeks, if you mailed your paperwork the old-fashioned way.
The first thing you should know about your tax refund is that getting it means you’re a bit of a sucker – you’ve been providing Ottawa with a tax-free loan for months. Anybody who would like to have me make deductions from their paycheque all year long, I promise to pay you your money back in May with no interest. No problem.
You should know, however, that there’s nothing to prevent you from reducing your taxes at the source: CRA has a form you can present to your employer. Your employer tax deductions may be higher than necessary for a variety of reasons – everything from not factoring in your RRSP contributions to charitable donations.
Want to spend that tax refund cheque on everyday items, or worse — a vacation? Don’t, it’s a temptation that could trip up even the best retirement planning in the world. The cash is yours to do with as you please. However, if you want to get the most out of it, you should probably avoid the following:
Go on a shopping spree
Don’t – One of the worst things you can do with your tax refund is blow it on stuff you don’t really need, like new clothes, fancy gadgets or a vacation. Of course, it’s perfectly fine to have a little fun with your cash, but tax refunds aren’t a windfall. They’re your hard-earned money and they should be treated like the rest of your income. If you have a budget — and you should — set aside whatever portion of the refund you normally would for fun activities and put the rest toward savings.
Using 100 per cent of your refund to treat yourself also raises the risk you’ll actually end up spending some of your other funds, as well. Because, let’s face it, what pair of shoes or vacation package is going to cost exactly the amount the CRA sent you? The temptation to go slightly over will be strong. Ditto on additional impulse buys: Now that you made it to the mall with your CRA cheque, why not also buy that lovely pair of pants that go so well with the shoes you just bought? Before you know it, you’ve busted your monthly spending limit or dug yourself deeper into debt.
Do – Use your refund to duel your debt. Using your refund as a lump sum debt repayment can reduce your interest charges and help you build better credit. Almost 4 in 10 Canadians use their tax refund to hack away at their outstanding balances on things like credit cards and lines of credit.
Leave it in your bank account
Don’t – Even if you aren’t going to touch one cent of it, leaving your refund in your bank account isn’t a good idea. Most Canadian bank accounts come with fees, and even the few that offer interest rates on your deposits generally don’t keep up with inflation. If you’re going to squirrel away your refund, make sure you’re getting the most bang for every one of your saved bucks.
Do – Stretch your dollar further. For example, you can contribute to your Registered Retirement Savings Plan (RRSP), which will net you a tax deduction next year. If you have children, you can channel the funds into their Registered Education Savings Plan (RESP), which will earn you a 20 per cent top-up from the government on the first $2,500 you set aside each year. You can also funnel the money into a Tax-Free Savings Account (TFSA), where it will earn income tax-free.
Bump up monthly expenses
Don’t – This is possibly even worse than wasting your refund on a shopping expedition. The latter will at least leave you with some new stuff in your closet – or fun vacation memories. But one of the risks of mindlessly depositing your CRA money into your chequing account is that you won’t even notice blowing through it. Leave those funds in there and chances are you’ll unconsciously bump up your routine purchases of lattés and cafeteria salads at work. Your extra monthly allowance will be gone before long and you won’t even know where it went.
Do – Build up your emergency fund. Rather than give in to more routine indulgences, use your refund to plan for the unexpected. Take the chance to build up an emergency fund. Trying to sort out finances while dealing with a serious life change can distract from what’s important, which is why it is essential to plan ahead and have an emergency fund.
Pay for a home renovation
Don’t – In a country obsessed with real estate and home renovations, many Canadians will struggle to resist the temptation to use their tax refunds to help pay for their dream kitchen or bathroom makeover. But granite countertops and rainfall shower heads, stunning as they may be, are unlikely to add a dollar to the value of your house for every dollar you sank in the major remodelling.
Do – Look for home fixes that will save you money or pay down your mortgage. Look for ways to save money within the home. For example, replace drafty windows and doors, add insulation under the roof, or switch to energy-efficient appliances. A new roof and windows return 80 per cent or more at resale and will save you a pretty penny on utility expenses while you’re living in the home. Another smart way to use your tax refund is paying off some of your mortgage, which can help you save on interest and reduce the amortization. Or, put money towards mortgage payments that can help save on interest, help pay down the principal, and reduce the amortization.
Whether it’s a major windfall or just a drop in the bucket, your refund should feel like “found money” – and if you’re smart, you can put it to work for you and improve your financial situation. You can even treat yourself – just don’t blow it at on a huge, unnecessary splurge. There is nothing wrong with a little self-indulgence but be prudent with your refund. Being prudent is a trait of Keeping Life Current.