Today marks the end of tax season. By now most Canadians are eagerly awaiting their tax refund — or have already pocketed their cheque from the Canada Revenue Agency (CRA).
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A whopping 64 per cent of tax returns processed so far yielded refunds, with the average cheque or direct deposit from the CRA coming in at $1,650.
The money will generally land in your mailbox or bank account within two weeks of filing, if you sent in your return electronically, or within eight weeks, if you mailed your paperwork the old-fashioned way, according to the CRA.
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The cash is yours to do with as you please. However, if you want to get the most out of it, you should probably avoid the following:
1. Going on a shopping spree
One of the worst things you can do with your tax refund is blow it on stuff you don’t really need, like new clothes, fancy gadgets or a vacation. Of course, it’s perfectly fine to have a little fun with your cash, but tax refunds aren’t a windfall that just dropped from the sky. They’re your hard-earned money and they should be treated like the rest of your income. If you have a budget — and you should — set aside whatever portion of the refund you normally would for fun activities and put the rest toward savings.
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Using 100 per cent of your refund to treat yourself also raises the risk you’ll actually end up spending some of your other funds, as well. Because, let’s face it, what pair of shoes or vacation package is going to cost exactly the amount the CRA sent you? The temptation to go slightly over will be strong. Ditto on additional impulse buys: Now that you made it to the mall with your CRA cheque, why not also buy that lovely pair of pants that go so well with the shoes you just bought? Before you know it, you’ve busted your monthly spending limit or dug yourself deeper into debt.
INSTEAD: Use your refund to “duel your debt.” That’s the advice from Jenny Diplock of TD Canada Trust. Using your refund as a lump sum debt repayment can reduce your interest charges and help you build better credit, she noted. Reassuringly, almost four in 10 Canadians use their tax refund to hack away at their outstanding balances on things like credit cards and lines of credit, according to TD.
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2. Unconsciously bumping up your monthly expenses for a while
This is possibly even worse than wasting your refund on a shopping expedition. The latter will at least leave you with some new stuff in your closet — or fun vacation memories. But one of the risks of mindlessly depositing your CRA money into your chequing account is that you won’t even notice blowing through it. Leave those funds in there and chances are you’ll unconsciously bump up your routine purchases of lattés and cafeteria salads at work. Your extra monthly allowance will be gone before long and you won’t even know where it went.
INSTEAD: Build up your emergency fund. Rather than give in to more routine indulgences, use your refund to plan for the unexpected. Take the chance to build up an emergency fund, advised Diplock. “Trying to sort out finances while dealing with a serious life change can distract from what’s important, which is why it is essential to plan ahead and have an emergency fund,” she noted.
READ MORE: Why the CRA waives penalties on many Canadians who admit they didn’t pay taxes
3. Leaving your refund to languish in your chequing account
Even if you aren’t going to touch one cent of it, leaving your refund in your chequing account isn’t a good idea. Most Canadian chequing accounts come with fees, and even the few that offer interest rates on your deposits generally don’t keep up with inflation. If you’re going to squirrel away your refund, make sure you’re getting the most bang for every one of your saved bucks.
INSTEAD: “Stretch your dollar further.” That’s how Diplock likes to put it. For example, you can contribute to your Registered Retirement Savings Plan (RRSP), which will net you a tax deduction next year. If you have children, you can channel the funds into their Registered Education Savings Plan (RESP), which will earn you a 20 per cent top-up from the government on the first $2,500 you set aside each year. You can also funnel the money into a Tax-Free Savings Account (TFSA), where it will earn income tax-free.
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4. Using your refund to help pay for a fancy home renovation
In a country obsessed with real estate and home renos, many Canadians will struggle to resist the temptation to use their tax refunds to help pay for their dream kitchen or bathroom makeover. But granite countertops and rainfall shower heads, stunning as they may be, are unlikely to add a dollar to the value of your house for every dollar you sank in the major remodelling.
INSTEAD: Look for home fixes that will save you money or pay down your mortgage. “Look for ways to save money within the home,” suggested Diplock. For example, replace drafty windows and doors, add insulation under the roof, or switch to energy-efficient appliances. A new roof and windows return 80 per cent or more at resale and will save you a pretty penny on utility expenses while you’re living in the home. Another smart way to use your tax refund is paying off some of your mortgage, which can help you save on interest and reduce the amortization, noted Diplock. Or, put money towards mortgage payments that can help save on interest, help pay down the principal, and reduce the amortization.
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