Tips on what to do with a tax refund

According to the Canada Revenue Agency, over 17 million Canadians received an average refund of $1,706 for the 2015 tax year. That’s a lot of additional money available that may help improve your financial situation.

So what should you do. Well, there is no one right answer to the question of how best to use a tax refund. Depending on your personal situation, you may want to take advantage of one of the following strategies or, if the refund is substantial, a combination of two or more.

The first two common financial strategies are not related to investing, but may be just as important to your long-term financial well-being. Pay down your debts. Statistics Canada reports that Canadians owed over $2.0 trillion in debts which accounts for $22,000 per Canadian-which does not include a mortgage either (according to recent 2016 figures). Using a tax refund to pay down the highest-interest debt will reduce those carrying costs and free up money you can put towards other financial goals. Next, build an emergency fund. A sudden job loss or unanticipated major expense can have a tremendous impact on a family’s financial security. One way to prepare for the unexpected is to build an emergency fund that can cover household expenses for between three and six month. Your tax refund may provide a solid lump sum towards this goal.

Next, let’s examine a few investment-related strategies for a tax refund. Each can help you build wealth and save towards specific objectives. Firstly, consider contributing to an RSP. If you are not yet maximizing your RSP contributions through a pre-authorized deposit plan, you may choose to avoid the panic of next year’s RSP season by dedicating last tax year’s refund towards this tax year’s RSP contribution. An RSP contribution can draw a tax deduction, of course, but the bigger benefit may be taxdeferred growth on your money as long as it remains inside your RSP.

Next, contribute to a TFSA. If you have not yet opened a Tax-Free Savings Account (TFSA), you have accumulated up to $52,000 in contribution room, including the new $5,500 limit for 2017. Your TFSA savings will never be taxed and not while the money stays in the plan and not on withdrawal. That may make a TFSA an excellent place to save for both short-term and long-term objectives, and somewhere to concentrate investments that earn heavily taxed interest income.

Think about adding funds to an RESP. Families saving for a child’s postsecondary education can contribute their tax refund to a Registered Education Savings Plan (RESP). Advantages include tax-deferred growth until the beneficiary (the student) withdraws money to pay costs associated with a qualifying educational program, and government contributions through the Canada Education Savings Grant (CESG), which matches 20 percent of the first $2,500 saved in an RESP for an eligible beneficiary each year to a lifetime maximum grant of $7,200.

For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com