Planning & Advice

What should you do with your tax refund?

May 17, 2015


What should you do with your tax refund?

Planning & Advice

The tax deadline has come and gone, and some Canadians will soon be receiving a tax refund from the Canada Revenue Agency. In fact, 58% of Canadians expect to get some money back this tax season.

Before you get too excited, remember: a tax refund is not free money from the government. It is just your money that the government is giving back to you. If you receive a large refund every year, it may be a sign that too much income tax is being withheld from your pay. If that’s the case, you may be able to file a form with Canada Revenue Agency to reduce the income tax withheld on your paycheques.

Now, let’s take Chris, who is expecting a refund of $1,000. What will have the most value for him now and in the future? What sort of benefits can he expect from his refund? How should he decide what to use the refund for?

There’s no shortage of money smart options. Chris could pay down debts like a credit card, car loan, or mortgage. He could spend it now to pay bills, save it for later in a savings account, or invest it in an account such as a Tax-Free or Retirement Savings account. Of course, he could also just go on vacation, but he’s trying to prioritize money smart choices first.

Refund Used For Benefit 1yr Change in Net Worth
Savings account @ 1% Peace of mind having savings Increase of $1010
Invest it @ 6% Save for the future Increase of $1060
Pay credit card debt @ 19.99% Less debt, less stress Increase of $1199.99
Pay down mortgage @ 3% Minor interest savings Increase of $1030
Donate to Nepal Earthquake relief Good karma, Federal & Provincial tax credits Increase of up to $717
Buy Apple Watch Consumer’s euphoria, one-upping friends None
All inclusive trip to Mexico Relaxing fun in the sun None

We can see that paying down high-interest debt and making long-term investments will the greatest impact on his net worth. Charitable donations provide the dual benefit of doing some good plus reducing taxes. And while shopping trip or vacation doesn’t improve his net worth it’s an experience that can improve one’s state of mind.

Now that we understand the financial implications of Chris’ options let’s look at what his fellow Canadians plan to do. According to recent surveys of Canadians the top expected uses of tax refunds are:

  1. Pay down debt (21%)
  2. Save it/not sure (19%)
  3. Pay day-to-day bills/expenses (18%)
  4. Invest (13%)

Canadians have been prioritizing debt repayment since the 2008 recession, so these results aren’t surprising. But does it make the most sense to focus on debt reduction when interest rates are at historic lows? Staying with our example, if Chris expects to earn a greater long-term return investing his money than he pays in interest on his debts, isn’t the choice to invest the money the wiser option? Yet, most Canadians have tunnel vision when it comes to debt reduction, which may, in fact, be at the expense of their retirement savings.

Things start to get a little more interesting when we compare the overall population to Millennials (age 18-34). Only 37% of Millennials plan to use their refund for the credit card or loan payments and day-to-day bills/expenses (compared to roughly 40% of the overall population), while 33% intend on saving or investing their refund (compared to roughly 25% overall).

While debt repayment is still the number one choice for Millennials, they are less focused on it than Canadians overall and more focused on saving and investing. It seems for all the grief Millennials take, they may actually be making more balanced choices with their money.

Make no mistake, paying off high-interest debt like credit cards and loans should be a priority. But with lower interest debts such as a mortgage, line of credit, or student loan, it’s worth comparing these against the expected long-term return of your investments before choosing to make a lump sum payment against that debt. Obviously, we’re not suggesting not making regular debt payments, but if as long as you’re sticking to the prescribed payment plan it’s probably worth allocating any excess funds to your investments.

Chris is fortunate and not carrying any credit card debt. In the end, he can’t choose just one option so he decides to do spread the money around. He pays down his credit line by $500 and donates the other $500 to charity, later investing the tax savings from his donation in his TFSA. He also fits in a frugal day at the beach to relax.

Remember it’s your tax return, but it never hurts to ask your WealthBar advisor for help determining the right choice for your situation.


Majority of Canadians expecting a tax refund plan to pay down debt
Tax study: Over one third of millennials will use their 2014 tax refund to pay bills or reduce debt

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