Eight tips to get maximum value from your tax refund


A tax refund can feel like an unexpected windfall, but it’s not free money. You worked hard for it so plan how best to use it to achieve your goals.

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Q: Last year I was fortunate to work pretty much the whole year. I graduated from university at the start of the pandemic and I never thought I’d find a great job as soon as I did. After seeing a few online ads for getting your taxes done, I thought I’d see if I could do them on my own. Up until the end of school I lived at home and my parents usually just did them for me. I figured I’d get at least some money back, but I didn’t want to believe I’d done them right until I saw the money in my bank account. Now I’m trying to decide what I should do with my $1,800 refund. I owe some money on my credit cards, and I just started saving for a trip. Any suggestions? ~Jennifer

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TO: Tax season is a time of year many people loathe. While some Canadians have a bill to pay when filing their income tax return, most years about 60 per cent of Canadians actually receive a refund. For those who have a straightforward tax return to file, doing it on your own can save you a little money. It could also motivate you to organize your financial affairs a bit better so that filing next year is that much easier.

When receiving a sum of money you don’t expect, it’s important to go back to your goals to decide how best to spend the money. While saving and paying off debt at the same time means that it will take a bit longer to achieve both goals, a balanced approach, especially during these unprecedented economic times, is your wisest course of action.

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With that in mind, here are some ideas to consider as you decide how to get the most out of your tax refund this year:

Free up money to spend on other goals

High interest credit-card debt can take a big bite out of our budget. When faced with the choice of paying down high-interest credit-card debt or setting money aside in savings, paying off your credit cards will get you ahead faster in the long run.

For example, a balance of $2,500 owing on a credit card that charges 20 per cent interest (APR), paying it off would save $500 each year and free up that money to spend on other goals. It’s always harder to save than it is to spend, especially when large parts of your paycheques are committed to making your debt payments.

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Buy yourself peace of mind

With living costs as high as they are right now, if you don’t have an emergency savings account, buy yourself some peace of mind by setting at least part of a tax refund aside for emergencies. Dealing with an unexpected expense is always easier when you have some cash on hand and don’t need to cover the whole amount with credit. And if you already have an emergency savings account, check the balance to see where you stand. Now might be the time to top it up.

The habit of spending and paying for it later will keep you in debt because life always has a way of happening. The only way to avoid letting an unplanned expense get you into debt is to have money set aside for spending when you least expect to need it.

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Invest in your skills

One of the best ways to control how much of a return you get on your investment is to invest in yourself. Go back to school to earn more credentials. This could position you well for career advancement. Depending on your work, a training course or professional development could beef up your paycheques. Become a member of an industry association and improve your networking or public speaking skills. Look for transferable ways to improve your skills and abilities. This will create a future filled with opportunities and income stability.

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Splurge on yourself

Always making responsible decisions with our money can be great for our bank balance, but not so good for our emotional health. Feelings of resentment can crop up when we work hard for our paycheques but never feel like we get to spend them on a splurge.

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Pick something from your wish list and treat yourself. It might be a game of golf at a course that’s normally a little too pricey, a new outfit, a piece of jewelry, or a weekend getaway with your significant other. Fit how much you spend on your splurge into your plan with the other goals you have so that you don’t get left feeling short in other ways.

Budgeting Guidelines for After-Tax Income

Improve your home

Without biting off more than you can reasonably do, consider which home improvements you may want to do within the next year or two. Either save a portion of your tax refund toward those costs, or do the ones you can afford with your refund right now. Look for ways to improve your home that will either save you money on your current bills or increase the value of your home for when the time comes to sell.

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Earn a top up for your child’s education

If you have children, deposit money into an RESP (Registered Education Savings Plan) to help fund your child’s post-secondary education. Each year you will qualify to receive a Canada Education Savings Grant of 20 per cent on the first $2,500 you deposit into the RESP. That’s up to $500 of free money every year that your child can use to help pay for post-secondary schooling or training. The money you contribute and the grants that are deposited to the account grow tax-free until you withdraw the money to help your child.

Help those in need

Helping others usually feels as good for the one doing the giving as it does for those on the receiving end of the generosity. Choose a reputable organization and support a cause that is important to you. There is no shortage of worthy causes, both locally and internationally, that depend on donations to fund their services or programs. Donate to a registered Canadian charity that will provide you with a tax receipt. You may also be able to find a giving campaign that has a matching component to increase the impact of your donation. Combine your charitable giving with volunteer work to see your gifts in action.

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Don’t Let Charity Take Its Toll on Your Credit Cards

Invest in your future

It’s always a good idea to contribute as much as you can to an RRSP (Registered Retirement Savings Plan) and max out contributions through any employer-sponsored matching program. The money your employer contributes to your RRSP is the equivalent of earning 100 per cent interest on your contribution. It’s a great deal if you can get it. In addition, you’ll still earn interest on all of the contributions to your RRSP and claim the deductions when you file your income taxes the following year.

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The bottom line on getting value from your income tax refund

Paying down your credit cards, loans or other debts, investing in yourself, or setting money aside for savings, are all great options for an income tax refund. What’s best for you will depend on your overall situation. Plan ahead to get the most value out of your refund whether it’s a few hundred dollars or several thousand. If the money is in your checking account, move it to another account so that you don’t spend it mindlessly while you weigh your options. While a refund can feel like a windfall, it isn’t actually free money from the government. You worked hard for that money, so making it work hard for you is only fair.

Related reading:

Why You Don’t Want a Tax Refund Next Year

How Income Tax Brackets in Canada Affect Your Pay

Filing Your Income Taxes, DIY or Hire a Pro?

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by e-mailcheck nomoredebts.org or call 1-888-527-8999.

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