Sunday, April 17, 2011

Wow! A tax refund – spend or save?

It’s great to get a tax refund, isn’t it? (Maybe not – but more on that later.) So, what are you going to do with it? You could spend it but then, it would just be … gone. In the interest of a long-term improvement to your personal financial picture, here are a few alternative tax refund uses to explore.

RRSP it Make your 2011 RRSP contribution right now and you’ll get the benefit of nearly an extra year of potential long-term tax-deferred growth and a tax deduction against next year’s taxes.

TFSA it You are allowed to save up to $5,000 a year in a Tax-Free Savings Account (TFSA). Your contributions are not tax-deductible but you will not be taxed on a cent of the investment income generated by your TFSA and you can re-contribute any of your tax-free withdrawals in a future year.

Invest it If your RRSP and TFSA are topped up, consider adding to your non-registered investments. It’s a sound strategy to hold stocks and equity mutual funds outside an RRSP or TFSA because these types of investments are taxed at a more favorable capital gains inclusion rate and Canadian investments qualify for the dividend tax credit.

Learn from it Set up Registered Education Savings Plans (RESPs) to fund future education costs for your kids. RESP contributions are not tax-deductible but their growth is tax-deferred and they qualify for Canada Education Savings Grants (CESG)1 of up to 20 per cent of your contribution.

Take interest in it Pay down costly credit debt with interest rates that can range from 15 to 29 per cent and then pay down non-deductible debt such as your mortgage – a single prepayment can chop months or even years off your repayment schedule and potentially save hundreds or thousands of dollars in interest payments.

Park it Got a large refund? Why not park some cash in a short-term investment that you can access without penalty. You’ll have a ready source of cash for a rainy day or maybe a new car without having to borrow or use your credit card. (You can also use a TFSA as a rainy day fund.)

Eliminate it Here’s why getting a tax refund isn’t the greatest: That refund cheque is not a gift from the government. It’s money you overpaid during the year and are now getting back without interest. Put more money in your pocket each pay period by applying to lower your withholding tax, using File Form T1213, available from your local Canada Revenue Agency (CRA) office or from the CRA Website www.cra-arc.gc.ca. (Québec residents must also fill out the Québec form TP-1016-V.)

A tax refund is great – a comprehensive tax-reducing, life-goal-achieving financial plan is much better. Your professional advisor can help make it all work for you.

1CESG is provided by the Government of Canada

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