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D Smith: Spending your tax refund

This is the time of year when Canadians receive their annual tax refund.

After the tax filing deadline on April 30, it only takes a couple of weeks to get a nice refund cheque in the mail, or deposited directly into your bank account.

When you receive a tax refund, you have overpaid your taxes through out the year. The government has kept your money interest-free for the past year and is now returning your money to you.

Many people consider a tax refund found money, but in reality this is your money back in your pocket.

So, what to do with your CRA tax refund?

How about splurging on a big screen TV or a large appliance to replace an old, tired appliance? Maybe a night out on the town?

Or you can use some practical ideas.

Some people decide to take a large tax refund, and pay off credit card debt.

Paying down debt can be hugely beneficial.

For example, if you have credit card debt running at 19 per cent or 28 cent interest, paying down that debt saves you the high interest charges on the outstanding principal.  High interest credit card debt is bad debt.

Making one or two months of extra mortgage payments each year will pay your mortgage debt years earlier.

You can purchase a term life insurance policy with your refund.

A 30-year-old non-smoking male can purchase a 10-year-term life insurance policy for coverage of $500,000 for less than $30 per month, a 30-year old female for less than $20 per month.

You can take your tax refund and contribute to your RRSP. You will be setting aside additional money for your retirement, plus receive a tax savings next year. It’s the gift of giving to yourself that keeps on giving.

A TFSA contribution will keep your money tax sheltered.

Choosing between contributing to your RRSP or TFSA should be based on reviewing your current marginal tax rate and your marginal tax rate in retirement.

It also depends on how many years the money will be invested.

Is this a long-term investment or an emergency fund? Make sure you have available room in your RRSP or TFSA before you make the contribution.

Contribute to a RESP.

As a parent or grandparent setting aside money for educational purposes and benefitting from the Canada Savings Education Savings Grant from the government will help with post-secondary education costs.

Donating $2,500 annually for a child will attract the maximum in CESGs.

Donating to a charity

is a way of helping others and creating a tax-savings for you.

Philanthropy means helping those in need.

You can also donate, or gift, money to your family members or heirs.  Gifting today allows you to see your gift enjoyed, or put to good use.  This also allows you to reduce the size of your estate.

Choose a fun way to spend your tax refund.

Deciding as a family on a vacation or week-end away can be an enjoyable way to spend your tax refund that only comes once a year.

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