As the deadline to file 2017 income tax returns approaches, many Canadians are either hurrying to submit their paperwork or patiently awaiting a refund from CRA. While it may be tempting to treat a tax refund as “free money”, it’s smart to look at it as you would any other income. Before you go out and start spending, read over our tips for making the most of your tax refund.
Clear (or reduce) any high interest debt
Many of us have some debt in the form of a mortgage or perhaps a home line of credit – both common scenarios that generally pose little risk to one’s long-term financial plan. The Bank of Canada raised the key interest rate several times in the past twelve months but it remains well below 4%, keeping mortgages and home LOCs fairly reasonable in terms of repayment. However, a credit card can have an interest rate as high as 18-20%. If have any high interest debts, such as a credit card or unsecured line of credit, make paying them down your first priority. Simply put, there is no investment with a guaranteed return high enough to counteract the monthly payments owed on a credit card carrying a balance. Knowing this, it’s wise to pay down any “bad debt” before using your refund for any investments or discretionary spending. For advice that is specific to your situation, please contact my team – we’d be happy to help guide you.
If you are not carrying any high interest debt, consider investing a good portion of your tax refund in your long-term financial plan. Depending on your needs, goals and risk tolerance, it may make sense to put the money toward your RRSP, TFSA or investment portfolio, or even to double up on a mortgage payment (if allowed). Your wealth advisor can tell you what’s best given your unique situation – for some, retirement savings may be the priority while others may want to invest more aggressively or pay down part of their mortgage. Again, my team would be pleased to help guide you in making the most effective decision given your goals.
Go ahead – live a little
While it’s important to address any outstanding debt and be proactive about your investments, we also feel strongly that clients should enjoy their wealth. Once you’ve decided how much of your refund to allot to debt repayment and long-term investments, make sure there’s some left over to spend on a “want”. This might mean a new electronic device, a day at the spa, a new piece of art for your home or updating your wardrobe. Whatever makes you happy, go for it – just make sure your needs (and debts) are addressed before getting to the fun stuff.
Remember – your 2017 income tax returns are due by April 30, 2018! If you have any questions about how our team can help support you at tax time, please refer to this recent post on the subject. Thanks for reading!