Despite tax refunds getting a bad name from just about every personal finance pundit ("it’s just an interest-free loan to the government!"), many Canadians still overcontribute to their taxes each year. Some even get thousands of dollars back.
The average Canadian shouldn’t sweat getting a tax refund. Think of it as a forced savings program. The issue is what they do with their windfall when they get it.
Many are tempted to spend it. Retail stores report an uptick in sales, especially for big ticket items, when income tax refunds start rolling in. This might be the most fun you can have with a tax refund, but smarter moves will pay off much more in the future.
The first step should be to use a tax refund to make a dent in any high-interest debt. This obviously includes credit card debt, as well as vehicle debt or even student loans.
The next step is investing. One of the nice things about putting a tax refund to work in an RRSP is it compounds the tax savings. $2,000 put towards an RRSP in the 25% tax bracket creates a $500 tax savings in the following year. That $500 reinvested creates a tax savings in the next year. It’s the closest thing many of us will see to free money.
Finally, put a little of your tax refund aside to have some fun with. The percentage is up to you, but I wouldn’t do anything more than 10% or 15%. You want most your cash to be put towards smart uses, not buying something frivolous.
