According to 2015 Canada Revenue Agency statistics, nearly 58 per cent of individual taxpayers received refunds after filing their tax returns. The average tax refund was $1,645.Getty Images/iStockphoto
Mark Karjaluoto doesn't mess around when it comes to his tax refund. The media relations specialist who works in Waterloo, Ont., has been diligently saving it in his registered retirement savings plan as soon as he gets his annual cheque.
"When you can maximize your RRSP contribution, you don't have to scramble to find that money down the road," says Mr. Karjaluoto, who has been investing his refunds for 17 years. "I'm boring," he laughs.
This year will be no different: Mr. Karjaluoto plans to pop the anticipated $1,000 into his RRSP. "Every dollar counts," he says. "One never knows what might come up."
This is music to the ears of Talbot Stevens, a London, Ont.-based speaker and author of The Smart Debt Coach: Secrets of the Rich to Increase Your Wealth and Security.
"Too often Canadians think of the RRSP as 'spend the refund plan,'" he says. "Ninety per cent of the population spends their refunds."
And many people do get refunds. According to 2015 Canada Revenue Agency statistics, nearly 58 per cent of individual taxpayers received refunds after filing their tax returns. The average tax refund was $1,645.
Mr. Stevens has a bold plan when it comes to RRSPs. He believes that RRSPs should be invested with the refund in mind.
Consider someone in a 50-per-cent tax bracket with $1,000 to invest. Note that if it has already been taxed via payroll deductions, it is after-tax money.
"If you get that $500 refund, and spend it, you've only put $500 toward your retirement goal, not $1,000 as most people think," says Mr. Stevens.
Reinvesting the $500 refund to contribute $1,500 is better, but it still doesn't invest all that you started with. If cashed out the next day losing 50 per cent to taxes, you would have only $750. But you started with $1,000 of after-tax money.
"The after-tax $1,000 equates to $2,000 before tax in an RRSP," Mr. Stevens explains. "That's how much an investor could, and should, contribute to their RRSP."
"When using RRSPs, contribute the full before-tax amount," says Mr. Stevens. He believes investors can increase their RRSP income by 25 to 100 per cent, depending on their tax bracket, by contributing the full, before-tax amount of their investable dollars.
However, if you've already received a tax refund because of an RRSP contribution, doing like Mr. Karjualoto and reinvesting it back in the RRSP is still infinitely better than spending it. Or, in the case of millennials who have a long retirement horizon, in a tax-free savings account.
Mr. Talbot says the TFSA has more flexibility as a millennial can withdraw funds for a large purchase without paying taxes on the withdrawal.
Look at your situation
Allison Marshall, vice-president, high-net-worth planning services, at RBC Wealth Management in Toronto, says RRSPs are a solid investment option.
She adds that contributions don't have to be reported each year. In the case of younger Canadians with lower incomes, holding off on reporting RRSP contributions on tax returns can mean bigger refunds down the road. "You can carry that deduction forward," she says, and use it in a year with higher income. "You don't have to report that this year."
For some Canadians who may have debt or some unfinished financial business, Ms. Marshall says a refund should trigger an analysis of one's financial situation. If a person has a high debt load, repayment should be top priority. One strategy is to use the tax refund to pay down debts, such as a line of credit or a credit card balance.
If someone's job is in jeopardy, or they're retraining for a new career, she says an emergency fund might be a good place to stash that refund. "You might consider putting that money aside if you lose your job," she says. "A TFSA makes a lot of sense if you have contribution room."
Or if you've recently married or have children, the money could be spent on estate planning. "There are some housekeeping duties that should be considered," she says. "You should consider updating your will or power of attorney."
In the case of kids, a registered education savings plan might also be a good home for that money. Or a gift of money to an adult child, who can top up their own TFSA. "Tax rules allow you to make this gift of money," says Ms. Marshall.
Ultimately, if you're getting a large tax refund each year, you might want to consider getting that money upfront, without having the "bank of CRA" hold onto your money until refund time, says Ms. Marshall. One avenue is to approach your employer to reduce the tax they are withholding each paycheque.
She suggests contacting the CRA and filling out forms which may allow you to reduce your taxes by highlighting the credits for which you are eligible, such as RRSPs and child-care expenses, to reduce your tax load. You can give these forms to your employer to reduce the taxes that are applied. "In theory, you would have more money to spend throughout the year," says Ms. Marshall.
Regardless, saving the tax refund should be a priority, says Ms. Marshall. "Savings – even if it's a small amount – can add up over time. Instead of spending the refund. Which many are tempted to do."