The best ways
to spend your tax refund
it or not, more than half of the 24 million-plus tax filers in Canada are entitled
to a refund if past experience is any indication. In 2002 and 2003, about 14.7
million of the 24 million tax filers received a refund, according to the Canada
Revenue Agency. The average refund was just shy of $1,200.
than blow the expected windfall on a trip or an iPod, financial advisors say there
are ways to spend your refund that will improve your financial picture.
Chris Gordon, an investment adviser at Edward Jones,
in Mississauga, Ontario, says "having extra cash is a good
trigger to think about strategies for putting money to work for
things that are important to you."
Clear the debts
way to get ahead is using that money to tackle outstanding loans. Gordon says
if you have an RRSP loan, "it's important that you pay that loan off as soon
as possible to minimize interest costs."
a fee-only investment counsellor at KCM Wealth Management, in Vancouver, says
the "biggest bang for your buck is to pay off credit card debt."
you're in a 40-percent tax bracket and have an outstanding balance on a card that
charges 10 percent interest, you have to earn about $16.60 just to pay every $10
of interest debt. If the card charges 20 percent, you'd have to earn $33 to pay
$20 of interest debt.
If your credit card is clean, Mastracci
says look at your lines of credit, car loans or mortgage. "Anything that's
not tax-deductible would certainly be a good place to put some money into."
Gordon says "paying down a mortgage is one option, even
if the mortgage interest rate is low." That's because the interest charges
over the long-term add up.
For example, the Bankrate.ca mortgage
calculator, shows that if you have a $150,000 mortgage balance
today at 5 percent over 25 years, your monthly payment will be $872.41.
The amount of interest paid during that time is $111,722.24, about
$372.41 a month.
you applied a $1,200 tax refund to your mortgage in May of every year, you would
pay off your mortgage almost five years ahead of schedule, saving $23,811.26 in
interest and free up your cash flow.
Even a one-time $1,200
payment shaves almost four months off your mortgage. "It becomes a good investment
in the long term," says Gordon.
for the future
If you don't have a high debt load, think about ways
to invest your refund, suggests Laurie Stephenson, a certified financial planner
at Freedom 55 Financial in Halifax.
Consider contributing the money to your Registered
Retirement Savings Plan now instead of waiting 'til next March.
"Lots of people leave it 'til the last minute. It's an opportunity
for the money to be working for you all year," says Stephenson.
$1,200 could also go into a spousal RRSP plan, she notes, which can help split
income in retirement. "You need to sit down with somebody and have a look
at planning in the year ahead."
Gordon adds that the tax
refund could also be used to pay off unused RRSP contribution room. Canadians
have billions of dollars in RRSP contribution room building up.
Stephenson says parents might want to consider putting
their tax refund into a Registered Education Savings Plan for their
kids. "If you drop it into an RESP, you will immediately get
a 20-percent grant from the government."
as the Canada Education Savings Grant, it provides up to $400 a year for those
who make the maximum $2,000 annual contribution. A $1,200 contribution will generate
$240, a 20 percent return, which is stellar in today's markets.
An alternative would be to use the tax refund to start
an unregistered investment account. By investing outside of your
RRSP, you can take advantage of the low capital gains tax. Investors
who have a capital gain outside of their RRSP will only pay tax
on 50 percent of that gain. "If you haven't got any RRSP room,
it's nice to have some non-registered investments," says Stephenson.
for a rainy day
Mastracci says another option for a tax refund is to
put something away for a rainy day. "People don't really have much in their
emergency funds." However, he says, make sure the emergency fund is held
at a different institution from the one holding your loans in case you need to
access it quickly. You don't want the bank laying claim to it to cover your debts
if something bad happens.
He adds that you can also make a
charitable donation and get a tax receipt that can be used to generate a refund
If you are getting a tax refund, Gordon says you
might want to reconsider the way you manage your tax payments. A refund means
you have overpaid your taxes and that's essentially an interest-free loan to the
He says you can fill out a Canada Revenue Agency
T1213 form, asking the government to allow your employer to reduce the amount
of taxes taken off your pay. That way, you will have the money in your hands sooner.
it's important to be disciplined in your finances, Mastracci says you also need
to have some fun in life. "Put some of that refund into improving yourself."
Take a cooking class or buy yourself something special. "Expand the horizon
a little more for yourself. I think there's some value to saying, 'Maybe I'll
do something for me.'"
is a freelance writer and lawyer based in Toronto. He's a frequent contributor
to the National Post, Investment Executive and Wall Street & Technology.