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Most experts still agree that paying down any high-interest debt accrued on credit cards and lines of credit needs to be the first goal.urbazon/AFP/Getty Images

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A couple of weeks before May 1, the latest Canada Revenue Agency (CRA) tax deadline, Janet Gray was fielding questions about taxes from a local TV station. Before long, she started feeling steamed.

Ms. Gray, an advice-only certified financial planner and money coach with Money Coaches Canada Inc. in Ottawa, knew what the reporter wanted – advice for Canadians on how they should spend any upcoming tax refunds.

But Ms. Gray had an additional salient point to make: Getting a refund shouldn’t be a cause for celebration. It’s actually a sign of costly mistakes.

“When people get a refund, they go, ‘Woo-hoo. Feels like I won the lottery,’” she says. “No. You just lent your money to the government interest-free for 12 months. How is that winning the lottery?”

Still, whether clients receive tax refunds because they maxed out their registered retirement savings plan (RRSP) contributions, received child care credits or overpaid on quarterly instalments, tax refunds aren’t going away. According to the CRA, Canadians who filed their taxes in 2022 and were owed a refund for the 2021 taxation year received an average of $2,053.

So, now that April has come and gone – and the Union of Taxation Employees strike is behind us – what are advisors telling clients to do with their tax refunds as they start popping up in bank accounts?

To be sure, between a worldwide pandemic, ever-increasing interest rates and continual worries about a recession, Canadians have been on a wild ride these past few years. Should that change typical financial advice about unexpected windfalls?

Paying down high-interest debt

Not really, Ms. Gray maintains. Most experts still agree that paying down any high-interest debt accrued on credit cards and lines of credit needs to be the first goal. Paying 20 or 25 per cent interest on card purchases is akin to throwing money down the toilet. It’s a no-brainer.

But after that, advice starts to differ between advisors. Emergency fund or registered education savings plan? Throw money at the mortgage to help pay off some principal or put aside some cash for kids’ costly education?

For Ms. Gray, an emergency fund is the next option to tackle after high-interest debt is sorted. If the pandemic taught us anything, it’s not a matter of if an emergency will arise, but when.

“There are four money pits in everybody’s lives – house, car, kids and pets,” she says. “Sometimes, you have to throw money at them when you least expect it.”

After all, it’s not like borrowing from a line of credit is all that cheap anymore. If clients still expect to depend on that as their emergency fund, it could cost them.

Topping up registered accounts and donating

Zakary Wexler, advisor at Inc. in Toronto, considers what many younger Canadians are up against when saving for the future. He’s a proponent of tucking any extra money away in RRSPs and tax-free savings accounts, explaining that compound interest over long time horizons will have a real impact on their lives later.

Invest $500 a year for 40 years, earning a modest 5 per cent interest, and that $20,000 will be worth $64,000. Not bad for refund money they weren’t expecting anyway.

If the client’s finances are already in order and there’s money remaining, earmark it for charity – even if the kids are asking for a new Xbox One or another high-tech gadget.

“When those kids reach their 20s or 30s and looking back, they don’t remember, ‘Oh, my mom and dad got me the latest iPhone.’ What they remember is, ‘Oh, my parents were very giving people,’” he explains.

“You’re instilling values and getting a tax write-off for next year.”

And don’t forget income protection. Sure, life insurance and critical illness insurance are downers – at least in comparison to blowing the refund on a trip to sunny Crete – but they’re vital.

“You might get excited to have $500, but god forbid something were to happen to you,” Mr. Wexler says. “Would your family prefer to have that $500, or would that $1-million life insurance policy have helped?”

Put it like that, and few clients would likely disagree with him.

The importance of self-care

Here’s one more smart way for people to spend their CRA tax refund – self-care. At least, that’s Tiffany Woodfield’s thinking. The associate portfolio manager with SWAN Wealth Management at Raymond James Ltd. in Kelowna, B.C., feels for clients and other Canadians who have felt the pinch these past years and are still experiencing lingering exhaustion. Using a tax refund to heal the mind and body just makes sense. Without good health, nothing else matters.

Ms. Woodfield, who uses meditation and yoga apps at home, says paying for health apps, gym memberships, vitamins and anything else that gives clients a mental and physical health boost can be well worth it.

“I don’t think people have recognized the stress that their bodies have been under. Sometimes, we have the excuse, ‘I just don’t have the money or time,’” she says. “Well, suddenly you’ve been given a gift. Do something that’s going to have a long-term impact.”

Contributing to mortgage or just spending

Finally, does it make sense to use the refund to pay the mortgage down these days? Most advisors would agree the answer is no if there’s higher interest debt to pay. But all clients’ situations are different, so ask questions.

For example, a young couple with a smaller credit card bill they can pay off next month could use the refund to make a lump sum mortgage payment on their variable rate mortgage. Paying off $1,000 in principle now would mean big interest savings 20 years later.

Whatever advice advisors give in the coming months around tax-refund options, it’s often okay to encourage a little splurge. Coming across as the wet rag of refunds won’t get them anywhere. Or worse, people might not come back.

“The reason clients don’t go to their advisor is because they feel like they’ll get into trouble if they want to spend some of the refund. It’s like going to the dentist and being told you weren’t flossing,” Ms. Woodfield says.

“But if you say, ‘It’s okay. I know you wanted to spend some, but let’s plan for part of it too,’ clients feel seen and heard.”

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