More than nine million Canadians have already filed their tax returns, according to recent statistics from the Canada Revenue Agency (CRA).
As of April 2, the average refund amount per tax return was $1,620. While many people treat a refund as a windfall, it’s technically an interest-free loan you made to the government.
Although it may be tempting to use your tax refund for a trip or a shopping spree, we at Ratehub.ca like to preach financial responsibility. Here are some ways you can use your refund more wisely.
1. Pay down debt
If you’re carrying debt, you should pay down your high-interest debt first. At the end of 2017, a report from TransUnion Canada projected that the average Canadian will carry $4,220 in consumer credit card debt by the end of of 2018.
With a refund of $1,620, you could pay off almost 40% of your credit card debt and have a balance of $2,600. If you’re carrying a balance on a rewards card or retail credit card, you should consider getting a balance transfer card to reduce your interest costs. If you don’t have high-interest debt but you decided to get an RRSP loan this year, you should the refund to pay down the loan.
2. Set up an emergency fund
Without an emergency fund, you could be forced to go into debt if your car needs to be repaired, you forgot about a property tax bill that needs to be paid, or you lose your job. Many financial experts recommend you should have at least three months’ worth of living expenses saved. A high-interest savings account is a great place to park your money in case of an emergency.
3. Save for a down payment
Saving for your first home can take many years of saving, especially in a hot real estate market like Vancouver. A report from National Bank finds it takes 440.5 months (nearly 37 years) of saving 10% pre-tax income annually to save for a house (single detached or semi-detached) in Vancouver. If you want to purchase a condo, it will only take 57 months (just under five years) of saving for a down payment. Across Canada, the news isn’t as bad. Among the 10 housing markets surveyed, the time required to save the down payment on a representative home at a savings rate of 10% was 35 months in Montreal, 27 months in Edmonton, and 49 months in Hamilton, Ont.
4. Save for retirement
Retirement may be a long way away for many people but it doesn’t hurt to start saving now. Using your refund to contribute to an RRSP can reduce the amount of tax you pay. If you’re an Ontario resident and have a marginal tax rate of 29.65%, you will get a tax refund of about $480 in 2018 if you contribute $1,620 to your RRSP. If your marginal tax rate is 47.97%, you’ll get a refund of about $777 if you make an RRSP contribution of $1,620.
5. Donate to charity
A 2017 Fraser Institute study finds charitable giving is on the decline. Just 20.9% of Canadian tax filers gave to charity in 2015 (the latest year of available data). Canadians are also giving less money to charity. In 2015, we gave 0.56% of our total income to registered charities, compared to 0.66% in 2010 and a peak of 0.78% in 2006. The report also finds Canadians are less generous than Americans.
Making a charitable donation will not only help a cause you believe in, it’ll make you feel better about yourself and you’ll get a tax deduction.
- How I (Successfully) Saved for an Emergency
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- A Full House-Style Life Lesson (in Personal Finance)
- How and Why I Save Money
Flickr: KMR Photography