So, you got a tax refund — now
what?
How you use your tax refund may help put you in a better financial position in the future. Here’s how.
Apr. 20, 2023
4-minute read
While getting a tax refund can feel like receiving an unexpected bonus cheque, the reality is that you likely overpaid your taxes last year and the government is reimbursing you. For example, your employer may have deducted more than was necessary from your pay. Or, as a self-employed person, you may have overpaid quarterly tax instalments. You could also receive a refund if you qualify for a refundable tax credit, like the Canada child benefit.
Whether your tax refund is big or small, it can be tempting to splurge. But before you grab your wallet, consider creating a plan to spend your refund wisely. Don’t worry, treating yourself is still possible!
Here are some simple ways you can use your tax refund to boost your financial wellbeing:
1. Pay down high-interest debt
On average, Canadians carry a credit card balance of $2,121 with average non-mortgage debt ringing in at more than $21,000.1 Taking advantage of your tax refund and using it to pay off debt is a great way to make a dent in what you owe, particularly if you have high-interest debts like credit cards or payday loans. You'll save on interest costs, improve your credit score and boost your overall financial health.
2. Set up or add to an emergency fund
The phrase, “It’s better to be safe than sorry” applies to a lot, but especially to our finances. The best way to plan for unexpected situations, like a leaky sink or loose bumper, is to have some money set aside to cover them. Aim to have enough cash available to cover at least three to six months' worth of expenses. Earmarking your tax refund for emergencies may provide peace of mind that you can handle financial obligations if the unforeseen throws your budget off track.
3. Make an extra mortgage payment
If your mortgage contract includes a prepayment privilege, applying your tax refund to your loan may not only shave months or years off your payments, but also lowers the total interest you'll pay over the term of the mortgage.
4. Top up your RRSP contributions
Looking for a win-win option? RRSP contributions are tax-deductible if you stay within your RRSP contribution limit, so investing all or a portion of your refund may help lower annual taxable income for this tax year or the future, depending on when you claim the deduction. Don't know your RRSP contribution limit? You may wish to review your most recent notice of assessment or use the My Account service from the Canada Revenue Agency (CRA).
5. Contribute to a Tax-Free Savings Account (TFSA)
A TFSA is a great way to protect your investment income from tax and make your money grow faster, especially if you're saving up for something specific, like a down payment on a home, a vacation, or a home renovation project. Your savings grow tax-free and you can hold a variety of investments and securities, such as cash, stocks, bonds, mutual funds and guaranteed investment certificates (GICs).
If you plan to use your refund to top up your TFSA, keep your TFSA contribution limit in mind. Your TFSA contribution limit is calculated as the total of the current year's dollar limit plus unused TFSA contribution room from the prior year, plus amounts withdrawn from a TFSA in the prior year. You can use the CRA’s My Account service to find your TFSA contribution limit as well.
6. Save for a child’s education
The Canadian government may provide Canada Education Savings Grants (CESGs) equal to 20% of your RESP contributions, up to a maximum of $500 each year and $7,200 overall per child. Plus, there’s no tax on investment income while it's in the plan, so your money can grow faster. Using your tax refund to contribute to an RESP is a smart way to give your kids a head start on the rising cost of post-secondary education.
Treating yourself to something you’ve had your eye on, like a new bike, or spending some money on a memorable experience is also a valid way to use a portion of your tax refund. Giving yourself a little boost now could also make it easier to stick with your saving habits going forward.
After all, life isn't always predictable. It's ok to reward yourself for the hard work you've put in to make sure you're financially well-prepared for the future.
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