A majority of Canadians have already received a tax refund this year, according to recent statistics from the Canada Revenue Agency (CRA).
As of May 2, the average refund amount per tax return was $1,671. 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 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. A recent TransUnion report finds credit card debt levels were at a three-year high at the end of 2015, with the average balance hitting $3,810.
With a refund of $1,671, you could pay off nearly half of your credit card debt and have a balance of $2,139. 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. An April report from National Bank finds it currently takes 106.8 months (or nearly 9 years) of saving 10% annually to make a down payment on a Vancouver home. If you want to purchase a condo, it will only take 40 months of saving for a down payment. However, it’ll take 377.7 months (or 31.5 years) to save for a house (single detached or semi-detached). Across Canada, the news isn’t as bad. In the 10 housing markets surveyed, it’ll take an average of 34 months of saving to come up with a down payment for a home.
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 $495 in 2017 if you contribute $1,671 to your RRSP. If your marginal tax rate is 47.97%, you’ll get a refund of about $801 if you make an RRSP contribution of $1,671.
5. Donate to charity
A 2015 Fraser Institute study finds charitable giving is on the decline. Just 21.8% of Canadian tax filers gave to charity in 2013 (the most recent year of data available), down from 25.1% in 2004. Canadians are also giving less money to charity. In 2013, we gave 0.56% of our total income to registered charities, compared to 0.61% in 2012 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. If you need an additional incentive to give to charity, the federal government is currently matching individuals’ donations to the Canadian Red Cross to help those displaced by the wildfires in Fort McMurray.
- How I (Successfully) Saved for an Emergency
- 4 Millennial Money Mistakes to Avoid
- A Full House-Style Life Lesson (in Personal Finance)
- How and Why I Save Money
Flickr: KMR Photography