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Here’s what Canadians should do with a tax refund (spoiler: not splurge) – National


Racing straight to the mall after receiving a tax refund isn’t necessarily the smartest idea — and that shouldn’t come as a surprise.

The lump-sum payment will be landing (or has already been deposited) in the majority of Canadians’ bank accounts. And while most know that saving and investing are the wiser options, it can be tough to know exactly what to do.

Here’s what Canadians should know about tax returns, what to do with them — and what to think about before splurging. 

Who’s getting a return, and how much?

According to the Canada Revenue Agency (CRA), 64 per cent of those who filled out income tax return forms are expected to receive a refund this year. Eighteen per cent will have to pay more and another 18 per cent won’t have to do anything.

As of April 16, the CRA had sent refunds to about 8.7 million Canadians, amounting to more than $14 million.

READ MORE: Canada Revenue Agency tweaks tax return process — here’s what to know

Those getting money received an average refund of $1,635.

Canadians who file returns online should receive the money within two weeks, and Canadians who filed paper forms may have to wait eight weeks.

WATCH: Making the most of your tax return





Curb your expectations

There are several things to consider before even receiving money, Jason Heath, the managing director at Toronto-based financial planning company Objective Financial Partners Inc., explained.

First of all, Canadians should have realistic expectations about how much money they are going to receive — and not pre-spend, or make plans to spend in anticipation of the refund, he said.

“If you’re counting on a big tax refund that doesn’t come, it can be really a negative financial situation for some people,” he explained.

Basically, don’t spend money you don’t have yet, or might not even end up receiving.

Heath said Canadians can manage expectations by using online calculators, or seeing an accountant, to develop a realistic sense of what to expect.

WATCH: Filing your tax return? Don’t forget these credits, deductions





The smartest options

While there is no one right answer for how Canadians should handle tax refunds, Heath recommends a few “productive” options.

Putting the money into a Registered Retirement Savings Plan (RRSP) is a good idea.

READ MORE: Here are the Canadians most likely to get a tax audit

“If someone is in a high tax bracket and they are a moderate risk or aggressive investor, then I think an RRSP contribution can be a great fit,” he said.

Using a tax refund to pay off a loan is another wise move, Heath said, especially if it has high interest.

For those with children, putting money into a Registered Education Savings Plan (RESP) might be the smartest option.

“It really depends on the family situation, but from my perspective, whether you are investing the money or whether you are paying down debt, those are both good things that help to improve your net worth.”

WATCH: What you need to know about your income tax return





Saving for short-term goals

Saving for retirement is something every Canadian should do, but tax refunds can also be saved for short-term purposes, said Jennifer Diplock, TD Bank’s vice-president of personal saving and investing.

“There may be some short-term goals like buying a new car, or doing a home renovation, that you’ll have a shorter time horizon for,” she told Global News.

She added that Canadians can meet those goals through several different avenues such as a Tax-Free Savings Account (TFSA), high-interest savings accounts or guaranteed investment certificates.

“I think it comes down to what your timeline is for when you need those funds, and how long you’d be comfortable with putting that money away to let it continue to grow,” Diplock said.

READ MORE: Waiting on a big tax refund? Then you did your tax planning wrong

What you (probably) shouldn’t do

Spending a tax refund on a tech gadget or piece of designer clothing you’ve been eyeing for months isn’t the best idea.

Heath said Canadians need to stop acting like a tax refund is like winning the lottery or receiving a bonus.

“It should be treated as money that you worked hard for and earned — the same way you would make smart choices with money earned over the course of the year.”

“The main thing is, as long as you’ve achieved all your financial priorities for the year, it’s a personal decision. It’s not to say that nobody should splurge with their tax refund,” Heath said.

Diplock added that the best way to make sure you have room to splurge is to have a financial plan.

“Don’t think of it as free money, and maybe not enter into spending without having a plan in place,” she said.

WATCH: This is how the Canada Revenue Agency is tweaking its tax return process





Do you eventually want a big lump sum tax return? Think about it.

As Canadians receive tax refunds, they may also want to make financial plans for next year. Part of that includes deciding whether they want a lump sum refund next April.

It may seem like a no-brainer, Heath explained — who wouldn’t? But it’s more complicated than that.

“If you get a big refund at the end of the year, one of my concerns is that you basically loaned money to the federal government interest free,” he said.

And while it’s nice to receive a chunk of money all at once, Canadians can fill out and submit the CRA’s T1213 Request to Reduce Tax Deductions at Source form, which asks employers to reduce tax witholdings. That means a bigger bi-weekly paycheque.

“I think that it can be beneficial to have more money in your bank account bi-weekly, as opposed to having the money at the end of the year,” Heath said.

Heath suggested that Canadians who decide to do this fill out the form around October, to give the CRA time to respond before January.

© 2018 Global News, a division of Corus Entertainment Inc.



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