TORONTO – The tax deadline is just days away (after an error at the CRA pushed the deadline date back to May 5), but many Canadians are already dreaming of what they’ll do with their refund.
While that annual cheque may feel like a windfall, remember, that’s your money the government is returning to you because you overpaid your taxes.
“That’s why it’s so important to be smart with your return,” said Joe Snyder, who is part of the Investments Product Management team at Tangerine. It’s not ‘free money’ — it’s your money.
Pay off your debts
There are a number of wise choices you could make when deciding what to do with your tax refund, but experts agree, paying off debt should be your first priority.
“The very first thing is to pay off credit card debt,” said Sean Meshke, CFA Investment Advisor with Prairie Wealth Management, in an earlier interview with Global News.
High-interest debt, like debts owed on credits cards, can be detrimental to your personal finances, said Snyder. “The first thing to do is to pay that down as fast as possible.”
Once your credit card debt is paid off, then look at other forms of debt you have, such as personal loans, auto loans, lines of credit and mortgage debt. “While the rates on those debts aren’t as high as credit cards, it’s always a good idea to pay those off as well,” said Snyder.
What to do once you’re debt-free? Start building up an emergency fund so that unexpected bumps in the road don’t put you back in the red.
“Say you’re a homeowner and your furnace breaks down…this stuff happens,” said Snyder, and then you’re in a position where you have to scramble to pay a $5,000 repair bill. “You don’t want to have to put that on a credit card, then have to pay that debt off,” he said.
READ MORE: How to survive a financial emergency
If you don’t have debt and you have built up emergency savings, then options for where to put your tax refund open up a bit.
“Age, lifestyle, where you are in your investment horizon — these all play into a factor of what you should do,” said Meshke.
One option is to park your refund in a savings vehicle like a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). Which account is right for you depends on your personal tax situation and whether you’re saving for the short or long term. Find out more about what account suits you better here.
RRSP vs RESP
Many parents feel like they should save for their child’s education in a Registered Education Savings Plan (RESP), but this may not always be the best option.
“It’s not a very popular thing to do,” said Snyder, but it may make more sense to save for your retirement over your child’s education. “They can get low interest student loans, but you need to take care of your retirement first,” he said. Once you’ve taken care of your debt, emergency savings and retirement funds, then it makes sense to put extra cash into an RESP, he said.
READ MORE: Should you save for your retirement or child’s education first?
The important thing to note, Snyder pointed out, is that if you are in a position to choose between saving for retirement, investments or an education fund, that’s a really good position to be in. “If you don’t have any debt…This is a lucky position to be in.”
With files from Global News’ Meaghan Craig
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