With tax season right around the corner, many Canadians are collecting their tax slips outlining your earnings and investments, gathering receipts and perhaps you’re even planning how to spend your income tax refund. To some, this perceived windfall is considered a “green light” to go on a spending spree. According to Canada Revenue Agency, the average income tax refund in Canada in 2019 was $1,740 – about the cost of an all-inclusive vacation for one in the sunny south, a few nice dinners out, or a decent shopping spree. However, if you’re getting an income tax refund, it means that you’ve overpaid in taxes and you’re simply getting some of that back. Stop treating this as “extra” cash and put these funds to work for you.
3 Ways to Save (or Spend) Your Income Tax Refund
Pay down debt.
It’s unlikely that you’ll miss this chunk of money, since Revenue Canada can already deducted these amounts from your regular pay cheques. So, why not use any refund you may get to pay down existing debt? Student loans, car loans, credit card debt – whichever has the highest interest rate. A lump-sum mortgage payment will go directly toward your principal, so this could be a good place to park any extra funds. Ensure your mortgage agreement offers pre-payment privileges. If this isn’t part of your deal, it’s something to consider when the time comes to renew your mortgage. Check with your lender if you’re not sure. You can learn more about mortgages here.
Stash it away.
Leaving your income tax refund floating around in your savings account makes it easy to access – and spend. Make the most of your tax savings and plan for the future, by contributing part or all of your tax refund into a Tax-Free Savings Account or a Registered Retirement Savings Plan. Each of these savings and investment vehicles has its different benefits, so you’d be wise to consult a financial advisor to determine which option is right for you. First-time homebuyers can take advantage of the Home Buyer’s Plan, which lets you borrow from your RRSPs to put toward your home purchase – interest free! In March 2019, the federal government increased the allowable amount from $25,000 to $35,000. That’s a decent chunk of change to put toward your down payment or other purchase-related costs. Just make sure you understand the re-payment requirements. Read more about it here.
Update your home.
While your income tax refund may not be enough to fund a full-blown renovation, the average amount that goes back into Canadians’ pockets is definitely enough to cover some small but sweet upgrades in your home. This can boost your home’s value on the resale market, not to mention the enhanced liveability you’ll enjoy. Find out how you can boost your home’s value with $1,000 or less.
This article was originally published on March 5, 2020 by Lydia McNutt of RE/MAX Integra