A Brief Discussion: Making the Most of Your Income Tax Refund

by Jeffery A. Keill CFP, CIM, FMA,FCSI, Portfolio Manager and Senior Wealth Advisor Keill & Associate- Advisory Team

Spring and taxes. For Canadians they go hand in hand. For many Canadians, it is also the time of year when tax refunds are arriving in mailboxes or directly into bank accounts. This influx of capital can be a great opportunity for most of us to improve our personal financial picture. In this Brief Discussion we will review some ideas that you might want to consider in your situation.

What is a tax refund?

It is important to remember that a tax refund is not a ‘windfall’. It is merely a repayment of taxes that you overpaid throughout the year. For many reasons individual tax payers get money back when they file their return due to the combination of excessive tax withholding, over paid installments, or the various deductions they claim. Refunds are the return of our own money we should not have paid in the first place.

What can I do to maximize the benefit of receiving a tax refund?

While every individual situation is different, there is one commonality between our financial decisions: you can either “spend it” or “save it”. There is no third option.

If you choose to spend it, then the immediate benefit is the gratification you receive on the item or experience you purchase. Enjoy.

If you choose to save your tax refund, then you have two options: invest it and let it grow, or pay down debt. Either choice will improve your balance sheet as you increase your assets or decrease your liabilities. Here are a few ideas to help “save it”:

Pay Down Debt

Credit cards, Lines of Credit, and other forms of consumer debt can erode cash flow as the cost to carry the debt (interest cost) can be significantly high. Take for example a credit card balance of $10,000 at 10% interest. This is approximately $83/ month just to pay the interest each month. Paying high interest debt down might be advantageous depending on the individual situation.

Making a One Time Extra Mortgage Payment

If you carry a mortgage on your home you may have the ability to make a one-time pre-payment against the principle. If your financial plan is to pay off your mortgage by a certain point in time (such as retirement) then making a one-time payment on the mortgage will make sense. Reducing the interest paid over the life of the loan, and reducing the number of year’s to pay it off completely.

Contribute to an RRSP

The contribution to an RRSP may have one of the most significant outcomes of any of the strategies because it harnesses three important areas of wealth accumulation if done correctly. First a contribution will help reduce your taxable income that may once again create an overpayment of income tax in the current year (another refund). Secondly it will provide for tax deferred growth on long term investments. Finally it can provide a rate of return greater than the cost of mortgage debt. This option is dependent on each individual income and tax situations.

Contribute to a tax free savings account

By making a contribution to your TFSA, you receive both tax-free growth that can have returns greater than mortgage debt, and at the same time allow for the building up of emergency funds. Many people do not have significant rainy-day funds. By holding money in a Tax Free Savings Account, the growth over time can be significant as it provides for that needed short term emergency account.

Buy Life Insurance

Many Canadians find themselves under-insured. No one wants to leave loved ones without the money they need to survive. The main culprits holding people back from this has always seemed to be a combination of time, money, and the thought it won’t happen to me. Reality is that it will happen, and so you should take the time to look into it. The money, if it was not available before, may now be available with your tax refund.

Make a Registered Education Savings Plan Contribution.

Another wise use of an income tax refund could be to put money away for a child’s education in a Registered Education Savings Plan (RESP). Most parents see the benefit of contributing to their children’s future, but again finances can limit the cash available for this future debt. The refund can top-up previous annual RESP contributions to the limit of $2,500 per beneficiary.

Get your Will and Power of Attorney Done

Many people seem to put off getting their Will and Power of Attorney completed. Much like life insurance, cost, time, and it won’t happen to me are the main reasons for not doing it. Setting aside other reasons, the cost may be covered with the influx of cash resulting from a recent income tax return. This is a good opportunity to get this important estate document done.

Make it a Combo!

One interesting approach most Advisors will look for is the ability to stretch the tax refund into several areas. For example, consider what could happen if you make an RRSP contribution that results in another refund. This refund can then be used to obtain one of your other financial goals. If you contribute $5,000 to an RRSP that results in a $2,000 refund, that refund can then be used to make an RESP contribution, get the family’s Will done, or to pay down debt.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Feb 11, 2025