How to use your income tax refund

Now is the time of year that many Canadians file their income tax returns in anticipation of a refund. The CRA reported for 2017 that over 57% of tax filers received a refund. The average refund in 2017 was $1,750.00 according to an article written by Rob Carrick in the Globe and Mail. Canadians can use their refund to reduce debt, travel, build an emergency fund or invest for the future with either a tax-free savings account (TFSA), registered retirement savings plan (RRSP) or registered education savings plan (RESP).

Every week, articles are featured in various newspapers, journals and online sources regarding the large amount of debt that Canadian households have. Credit cards are typically associated with having the highest interest rates, generally set around 18% to 20%. If interest rates continue to rise in 2018, the amount of monthly payments against a debt will also rise. Mortgages often have opportunities for making a lump sum payment annually. By making a lump sum contribution with your tax refund, you decrease your repayment period and save on the overall interest payments. Take advantage of the lower interest rates and use your tax return to pay down your debt or mortgage.

If you are debt-free than consider putting your tax refund towards your RRSP, which can increase the possibility of a refund in 2019. Once the RRSP is topped up or if you are not eligible to contribute, you can deposit your refund into a TFSA. Canadians are allowed to contribute $5,500 in 2018 and can 'catch up' on missed contributions from previous years, to a maximum contribution room of $57,000. The benefit of a TFSA is that the money you withdraw is tax-free and not classified as income, so there will be no impact to your CPP or OAS payments.

Grandparents and parents might consider contributing to their grandchild’s or child’s education with a deposit towards their RESP.  A 20% grant is added to the contribution room, to a maximum of $500 per year. This provides an instant 20% growth to your investment before taking into account the investment returns. This is a great way to facilitate the intergenerational transfer of wealth over time and contribute to a child’s or grandchild’s post-secondary education. Don’t miss the opportunity to put your tax refund to work for you or your family.