It’s usually better not to get a tax refund but if you are getting one the key question is what you should do with your refund. You could simply spend it but there are other alternatives with longer term benefits for your financial future:
1. Immediately use your refund to make up your 2014 Registered Retirement Savings Plan (RRSP) contribution and you’ll get the benefit of nearly an extra year of potential long-term tax-deferred growth plus a tax deduction against next year’s taxes.
2. Contribute to investments held in a Tax-Free Savings Account (TFSA). You are allowed to invest up to $5,500 a year in a TFSA. Your contributions are not tax-deductible but you will not be taxed on the investment income generated by the investments in your TFSA, you can make tax-free withdrawals for any purpose at any time, and you can re-contribute any of those withdrawals in a future year.
3. Invest it. If your RRSP eligible investments and TFSA are topped up, consider adding your refund to your non-registered investments. The most tax-efficient strategy is to hold stocks and equity mutual funds outside RRSP eligible investments or a TFSA because these types of investments are taxed at a more favourable capital gains inclusion rate plus dividends from most Canadian corporations are eligible for the dividend tax credit.
4. Pay for your kids’ education. Set up Registered Education Savings Plans (RESPs) to fund their future education costs. Contributions to investments within a RESP are not tax-deductible but their growth is tax-deferred and they qualify for Canadian Education Savings Grants (CESG)* of up to 20% of your contribution for the first $2,500 you contribute in your child’s RESP each year.
5. Pay down costly, high-interest credit debt and then pay down non-deductible debt such as your mortgage – a single prepayment could potentially save hundreds, even thousands of dollars in interest payments.
6. If your refund is large consider parking that cash in a short-term investment that you can access without penalty. That way, you’ll have a ready source of money for a rainy day or a larger purchase – a new car? – without having to borrow or use credit. (A TFSA is also a good rainy day fund.)
Getting a tax refund feels good – what will feel even better is talking to your professional advisor about not getting one next year as part of a comprehensive tax-reducing financial plan that will make it possible for you to achieve all your financial and life goals.
*CESG is provided by the Government of Canada
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.