Taxes form an important part of your financial planning. Every new year you are expected to file your IT return and the government authorities verify it. However, there is an interesting statistic that cannot be ignored. In Canada, around 2/3rd of the taxpayers get refunds almost every year on the taxes they have paid. So, the odds are high that you can be one of those eligible to get the tax refund. Below are the five most important ways to look at tax refund spending ideas in Canada.
Read: All You Need To Know About Taxes On OAS In Canada
5 Tax Refund Spending Ideas in Canada
1. A Way of Investing in Yourself
Everyone gets happy after getting their tax refunds, but only a few are efficient in using the proceeds. One of the ways is you can contribute to your TFSA (Tax-Free Savings Account). This account protects your returns from taxing and is a savings account.
The limit in this account is $6,000. This account also helps you in earning higher interest rates. If you are planning for your retirement or in that stage then you can think of contributing to RRSP (Retirement Savings Plan). It acts like a tax-deferred account and shields your savings who have collected for retirement from taxation, but until withdrawal.
Read: How To Select The Perfect Location For Retirement In Canada?
Here the contribution is to the north of 18% of the income you earned or $29,210 (whichever is lower). Other ways are investing in less expensive accounts like brokerage accounts which are self-directed. This is indeed one of the best tax refund spending ideas in Canada.
Read: Can You Transfer RRSP To TFSA Without Penalty?
2. Invest in yourself by Educating yourself
There is no greater and fruitful investment than investing in yourself. It will pay you the best interest. Financial literacy has become a basic requienment and cannot be ignored.
You can read great books about great people and learn from their experiences. This not only gives you a sense of accomplishment but also puts your money to work and manage your wealth.
Read: Top 15 RRSP & TFSA Mistakes To Avoid In Canada!
Here is the a of books to educate yourself:
- One up on Wall Street by Peter Lynch
- The Four Pillars of Investing
- The Intelligent Investor – Benjamin Graham
- The Richest Man in Babylon – George S. Clason
- The Little Book of Common Sense Investing – John Bogle
- A Random Walk Down the Wall Street – Burton Malkiel
- The Four Pillars of Investing – William Bernstein
- The Wealthy Barber – David Chilton
- The Automatic Millionaire – David Bach
Read: How Will You Receive The OAS & CPP Pension On Moving Abroad?
3. Invest in Your Children
Nothing can beat your sound financial planning if you start thinking about your kid’s future. You can start investing in RESP (Registered Education Savings Plan). This account serves your purpose of saving for your child’s post-secondary education.
Let’s skip to the good part – You won’t be taxed until your kid withdraws in the foreseeable future. Hence, it comes under the type of a Tax-deferred account. Even the taxes paid by your children at the time of the withdrawal would be less, as they will fall in lower tax brackets.
Read: ODSP Payment Dates 2022: When Will You Get Your Disability Benefits?
Additional leg of credit is provided by the Government. They match your contributions to the tune of 20%, which can be translated to Five hundred dollars a year (and $7,200 over the life of the account)
This translates into free returns of 20%, and compound interest makes it even more interesting.
Read: Your Guide To Best Dividend Stocks In Canada In 2022
4. Invest in Others
Investing in others is not the literal investment for the sake of returns, it includes doing donations, charity, and supporting local or national level organizations that are into the well-being of others.
In the end, a good deed goes a thousand miles. Once you make a donation, you can use that receipt while filing your tax return to claim tax credits and initiate a tax refund. It might not be one of the popular tax refund spending ideas in Canada, but worth the effort.
The limit to get a refund when you do donations is – you are eligible for a 15% on your first $200 donations and then 29% on any amount exceeding the former one. First-time donors have a reason to cheer, as they are eligible for an additional 25%.
Read: Know These Terms For Retirement Planning In Canada
5. Paying Your Own Debt
As Mark Cuban said, “Pay off your debt first. Freedom from debt is worth more than any amount you can earn”. Paying off debt not only gives you good sleep at night; it makes sure that your credit score is high and in the future if you want more debt you can get it at a good interest rate. Debts have their own type, and nonetheless, you should aim for paying high-interest rate debt first. This could include your credit card debt, where interest rates are higher and take a majority chunk of your income. Mortgages and other low-interest-rate debt can follow the suit.
For starters, credit cards generally charge an interest rate to the north of 25%. This doesn’t take a genius to figure out paying this debt first given the same amount you will invest to get half the return of what is charged.
Read: Can You Withdraw RRSP Without Paying Taxes?
Also Read: Do You Have to Pay Canada Inheritance Tax?
Closing Thoughts on Tax Refund Spending Ideas in Canada
Ask yourself this question, is tax refund free money? There is no free lunch in this world, not when the government is involved. If you think otherwise, then let me tell you that you have paid more money in tax for a particular year which you are waiting to get back. In other words, it’s an interest-free loan provided to the government and you bear the opportunity costs for it.
One way to reduce this opportunity cost, and put your money to work is that you can take a step forward by updating your tax details and in turn reducing your withholding taxes (TDS taken by your employer).
There is a simple process to do this. You can complete Personal Tax Credits Return Form (TD1) and Request to Reduce Tax Deductions at Source form (T1213). After doing this process accurately, you can aim for a small sum of refund from the government.
It depends from people to people on how they want to manage their tax refunds and put them to efficient use to fulfill goals. I hope these tax refund spending ideas in Canada would help you with decision-making on how you can relocate your hard-earned money.
Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?
Leave a Reply