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Make your tax refund work for you
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(NC)—If you're like most Canadians when you file your income tax return each year, you're hoping for a healthy tax refund – a lump-sum cheque from Canada Customs and Revenue Agency. But do you ever plan on what you are going to do with the money?
You may have considered purchasing a new car or the latest electronic device. Or perhaps, you're planning a family vacation to a warm destination. While these are certainly exciting ways to spend your refund, you should consider how to make your tax refund really work for you.
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Getting a Tax Refund this Year?
If you think you might be getting a tax refund this coming year, Tien Le, Certified Financial Planner (CFP™) and Toronto-based CIBC Imperial Service financial adviser, offers these strategies that may help you maximize its value over the long-term.
Reduce your debt load. High-interest, non-deductible debt, such as outstanding credit card balances and loans, is particularly costly, given that it is paid out of your net, after-tax earnings. Use your refund to help retire these debts as quickly as possible.
Repay your RRSP loan. When you take out a Registered Retirement Savings Plan (RRSP) loan, you will be charged interest on the outstanding balance until the loan has been fully paid. By paying off your RRSP loan ahead of schedule, you'll reduce the amount of non-deductible interest you pay.
"Once your loan is paid, consider starting a regular investment plan with the money you were using to make payments on the loan," remarks Le. "By automatically setting aside a fixed amount each month, you're more likely to reach your maximum contribution limit, without having to borrow again next year."
Contribute to your RRSP. You can contribute your lump-sum tax refund directly into your RRSP (provided sufficient contribution room is available). This can benefit you in two ways: you'll receive a tax deduction for the current year, and your contribution will begin to generate tax-sheltered compound growth right away.
Invest in your child's education. If you have children, you may wish to consider opening a Registered Education Savings Plan (RESP) or adding to an existing RESP. You can contribute up to $4,000 a year for each child, with a lifetime total of $42,000 per child. If your child doesn't pursue post-secondary studies, the income and growth on your contributions can be rolled over tax-free into your RRSP or a spousal RRSP, provided that contribution room is available.
This article is not applicable in Quebec.
- News Canada
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By: M. Williams
Date: November 15, 2004
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