Received Your Tax Refund – Now What?
Congratulations on filing your 2020 tax return! If you fall into the over 13-million Canadians who received a refund (as of April 29, 2021), you may be contemplating how to best make your refund work for you. To help you make sense of your options, we have put together a list of easy-to-implement uses for that extra cash.
1. Pay Down Your Debt
According to a Q4 2020 report from TransUnion, the average Canadian consumer carries a credit card balance of $3,661 and an average debt of $29,529 excluding mortgages. There is a strong chance those debts are bearing high interest rates, especially on your credit card (typically around 20%).
Look at paying down higher interest debts first. Beyond the pure stress relief of tackling debt, paying down the higher-interest debts first ensures that more of your money goes to the actual debt, instead of only paying down the interest.
2. Pay Down Your Mortgage
Most mortgages in Canada allow you to make an annual lump sum payment of up to 20% without penalty. Review your mortgage contract to determine if, when and how you are eligible to do so. Some lenders allow you to make the payment at any time during the year while others require it to be on your mortgage’s “anniversary date”.
Check how much you could save by making a lump sum payment on your mortgage, by trying out the Government of Canada website’s pre-payment calculator tool.
3. Invest Into an RRSP and/or a TFSA
The average retirement age in Canada has increased from 61.6 (in 2000) to 64.5 (2020). According to Statistics Canada, if you retire at age 64, you can expect to live (happily retired) for another 21.7 years. Longevity for you, and your savings, is the ideal - ensuring that your finances can sustain you through retirement is critical.
Saving for retirement in a registered retirement savings plan (RRSP) not only offers tax deductions, but it also provides you a tax-deferred solution for your investments.
You may also wish to consider another valuable retirement tool – the tax-free savings account (TFSA). A TFSA provides you an after-tax savings option; because you have already paid tax on your money, no taxes are levied on any investment growth in the future.
4. Save For Your Child’s Education
Tuition in Canada has increased steadily over time. Statistics Canada has reported that in 2020/2021 the average Canadian undergrad pays $6,580 per year for tuition, while the average post-graduate pays about $7,304. Bear in mind that this number varies by what you study and where you study it.
Utilizing a registered educations savings plan (RESP) allows you to save for your child’s future and take advantage of savings-matching through government grants (up to a maximum of $7,200) and bonds (up to $2,000 for modest-income families). Make your investments go further by unlocking these valuable contributions. Investing today can alleviate the burden of future costs, open educational doors and create a world of possibility for a child in your life.
If you would like additional information on RESPs in Canada, including how the grants and bonds work, feel free to reach out to us and say hello or visit the Government of Canada website to learn more.
5. Invest in Yourself!
No article would be complete without shouting from the roof tops the intrinsic value of self-care. Being fiscally responsible is important, but the investment in our mental health, our hopes and dreams, and our “bucket list” items carry its own worth. “Worth” is as individual as you are. Consider the value of turning a dream into a reality - create your bucket list and see what that would cost, even if it’s just for fun. Throw a bit of caution to the wind and plan out the costs for that long overdue kitchen renovation or the pool you’ve always wanted. Unless you plan it out, you may never know how achievable it could be. Remember – your money serves you. Sometimes, it’s for an RRSP. Sometimes, it’s for a fancy dinner. Or a new coffee maker. Regardless of how you budget, knowing your financial goals and still finding opportunities for fun in the spaces between the ledger lines can be a healthy balance to consider.
6. How Healthy is Your Emergency Fund?
According to the 2019 data from the Government of Canada, 64% of Canadians have an emergency fund healthy enough to float 3 months’ worth of expenses. While there are options (and opinions) on where to “park” this money, a lower risk investment that can be turned into cash quickly—like a TFSA—is ideal. The goal for the emergency fund investment is to obtain a rate of return that would mirror inflation (or higher) ensuring you obtain the same purchasing power in the future when you may require those assets. In plain speak, if you can withdraw $1,000 from your investments and actually end up with $1,000, it’s a good option for emergency use. Paying tax on your emergency funds just adds insult to injury.
When contemplating the use of your emergency fund, consider: “is this urgent, necessary and unexpected?” If the answer to all is yes, then it is clear that your emergency fund should come to the rescue. If the answer to some is no – consider your options and proceed with care. Examining your definition of urgency, necessity and your ability to “go with the flow” is helpful in emergency planning.
COVID-19 has provided us the opportunity to take stock of our physical and emotional wellbeing. It may be beneficial to focus additional effort on replenishing or shoring up your emergency fund if circumstances allow.
7. Donate to Your Favourite Charity
Donating to your charity of choice helps others – and your bottom line (thanks to tax deductions*). During COVID-19, not-for-profit organizations have seen a significant rise in usage by Canadians but have not seen an equivalent rise in donations. According to the Angus Reid report, 37% of Canadians have reported giving less to charities since the pandemic started.
The Choice is Yours
We have offered you with options on how to make use of your refund—now the choice is yours. Everyone is unique. Be mindful of your financial situation when determining what choice fits best for you and your family. If you would like additional information or guidance on your tax refund, feel free to reach out and say hello!
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Chris Santos
Group Retirement Consultant
* Please note that charitable donations are a non-refundable tax credit; this means you must claim your other credits first. If the impact of your other credits is sufficient to bring your tax payable to zero, you will not be able to use your charitable donations to generate or increase a tax refund. If you still have tax payable, you will be able to use all or a portion of the donation amount. You can carry forward unused donations for up to 5 years but remember that donations can be claimed only once. For additional information on charitable donations in Canada and the tax implications, visit TurboTax for an informative article.