Tax time for most people is right around the corner and that means that some people may be looking forward to a refund. Others who owe taxes will want to reduce their tax bill as much as possible. While it might be exciting to think of all of the extra spending money in your pocket, there may be more strategic ways to make that money work for you.
Jonathan Carter, CPA, CMA of Kata Accounting Solutions Professional Corporation, headquartered in Simcoe County with virtual employees all over Canada, sat down with me to share some great advice for Canadians who are entitled to a refund.
Four Ways to Spend Your Tax Refund Smartly
Pay Down High-Interest Debt
According to Jonathan, paying down high-interest debt is a good idea. “It’s always better to bring your overall interest rate on debt down,” he says. “Anything that can be done in that manner is a wise move.”
That doesn’t mean that you have to reduce your debt to zero before you start having any fun, though. “We don’t necessarily advocate being debt-free, as leveraging debt responsibly is an extremely common tool to grow wealth and fund lifestyle. Most people can’t afford to pay off their mortgage before doing anything else with their money,” explains Jonathan.
Consider Contributing to Your RRSP
Another smart way to use a tax refund is by investing it into your retirement fund. Jonathan says, "contributing to your Registered Retirement Savings Plan (RRSP) is a good idea for most people."
“If you have room, contributing to your RRSP decreases the taxes payable for the current year and can result in a higher tax refund, if a refund is appropriate. However, not everyone can benefit from contributing to an RRSP,” he says. “If there are no taxes payable, contributing to your RRSP, although helping you to save for retirement, doesn’t help to reduce your taxes.
Similarly, if the person has a lot of potential future income, say from rental properties, then they may be better served by investing in their TFSA or an unregistered program. Not everyone’s situation is the same and the subtle differences are important to consider.”
Build Up Savings in a TFSA
If you are looking for another way to invest, consider a Tax-Free Savings Account (TFSA). They are a great tool for tax-free investing for the long-term. “TFSAs are a fantastic place to park and earn while deciding what to do with your money,” says Jonathan. These accounts are great for saving towards a vacation, a down payment on a home, or to manage RRSP contributions.
“I would rather people use their TFSAs as long-term investment vehicles rather than short-term parking spots, though. People can save for vacations in their regular accounts. They don’t necessarily have to use a TFSA for those kinds of things,” he explains.
Planning for the Future
Jonathan also suggests putting the money in a federal government program like a Registered Education Savings Plan (RESP) or a Registered Disability Savings Plan (RDSP). While these programs don’t have immediate tax benefits, they do have future income benefits for the beneficiary.
“Contributions to RESPs and RDSPs can be eligible for some government matching depending on your income and can earn income on a tax-deferred basis for future benefits,” he says.
While a shopping spree may sound like fun, you might want to consider one of these smart options for your tax refund instead. Of course, there’s nothing wrong with setting some of your refund aside to enjoy a little more frivolously while still being smart with the bulk of your money.
To find out more about how a cloud-based tax accountant can help you to make smart financial decisions that work for your unique circumstances, contact KATA Accounting’s helpful team.
Disclaimer: Not all Canadians are entitled to a refund every year.