Building your Financial
Success
With Alain Aube
Tax Planning
Save or spend? What to do with your
tax refund
A tax refund cheque is always a welcome sight. But before you rush out
and spend it in a flurry of shopping, consider this: that refund cheque
is not a gift from the Canada Revenue Agency (CRA). It's your money that
the government has had for its use during the year and is now returning
to you. You didn't receive any interest on that money. All you got back
was exactly what you overpaid. So why not do two things right now? Spend
a few minutes considering how you can best put that refund to work for
you and plan on not getting a refund next year. Here are some refund
investment options that will definitely improve your financial life:
Get a head start on your RRSP contribution. Put your refund
towards your next year's Registered Retirement Savings Plan (RRSP)
contribution. You get the benefit of almost an extra year of potential
long-term RRSP tax-deferred growth, plus a tax deduction against your
taxes next year.
Boost your non-registered investments. If your RRSP is topped up,
use your refund to add to your non-registered investments. It's
generally a tax-savvy strategy to hold stocks and equity mutual funds
outside an RRSP, because any gains on these investments are taxed at the
more favourable capital gains inclusion rate. As well, Canadian
dividends received from these types of investments qualify for the
dividend tax credit.
Get a head start on education costs. Consider contributing to a
Registered Education Savings Plan (RESP) to fund your children's future
education costs. RESP contributions are not tax deductible, but their
growth is tax deferred and they qualify for Canada Education Savings
Grants* of up to 20 per cent of your contribution.
Pay down your most costly debt. The interest on credit card debt
often ranges from 15 to 29 per cent. It makes good sense to reduce or
eliminate that debt first.
Pay down your long-term debt. Once you've taken care of your
high-cost debt, consider using your refund to pay down non-deductible
debt. For example, a mortgage pre-payment will chop months or years off
your repayment schedule and could save you hundreds or thousands of
dollars in interest payments.
Put your refund in short-term parking. If your refund is big
enough, park some cash in a short-term investment where you can access
it without penalty. That way, you'll have a ready source of cash for a
new car or emergency home repairs without having to ramp up your credit
card debt or borrow to meet unexpected expenses.
Zero next year's refund. Apply to have less tax withheld from
your paycheque. You'll have a little more money for your own use every
pay period instead of having to wait for your once-a-year refund cheque.
Apply to lower your withholding tax using File Form T1213, available
from your local CRA office or from the CRA Website, www.cra-arc.gc.ca.
[Quebec clients also have to file the Quebec form TP-1016-V]
Tax refunds are great, but comprehensive tax planning is much better.
It's the best way to get the most out of what you earn and invest. A
professional financial advisor can help develop the right tax strategy
and financial plan for you.
*CESG provided by Human Resources and Skills Development Canada
This column, written and published
by Investors Group Financial Services Inc., is presented as a general
source of information only and is not intended as a solicitation to buy
or sell investments, nor is it intended to provide professional advice
including, without limitation, investment, financial, legal, accounting
or tax advice. For more information on this topic or on any other
investment or financial matters, please contact your Investors Group
Consultant.
