Smart ways to manage your tax refund

Smart ways to manage your tax refund

Passionate and engaged DIY investors are likely already aware but Canadians can begin filing their income tax returns as of last month, with more changes for the 2024 tax filing season.

Most Canadians are also aware they must file their tax return by April 30, which is also the deadline to make a payment for those who owe money to the government.

Canadians who are self-employed, along with their spouses or common-law partners, have until June 15. Since that day falls on a weekend, I read that the Canada Revenue Agency (CRA) will consider a return to be on time if it is received by or postmarked on or before June 17.

Self-employed Canadians must still pay money owed to the CRA by the April 30 deadline to avoid paying interest.

New tax changes – FHSA

This year is the first tax year that taxpayers will be able to enter deductions on the First Home Savings Account (FHSA), a type of tax-free account rolled out by the federal government in 2023 to help younger Canadians save on their first home.

I consider the FHSA as a hybrid account between the existing TFSA and RRSP Home Buyers’ Plan. 

1. FHSA contributions are tax-deductible like the RRSP and qualifying withdrawals out of the account are not taxed just like the TFSA.

2. To be eligiable to open and contribute to your FHSA you must be: a Canadian resident + 18 years or older + *a first-time home buyer. (Meaning, existing homeowners AND folks that owned a home in the *last four preceding years of trying to open the FHSA won’t qualify to open this account).

*An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either (i) they owned or (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).

3. The FHSA can hold stocks and bonds and ETFs just like the TFSA and RRSP.

I’ve added these details above because I believe the FHSA is now a relevant option related to smart ways to manage your tax refund. 

Read on. 🙂

1. It’s not found money – so use your tax refund wisely

Before splurging on a trip to Costa Rica or visiting the white sandy beaches of Punta Cana each winter, I think you need to consider some other options with your tax refund – since it’s not something to really celebrate.

Any tax refund is really a government / Canada Revenue Agency interest-free loan back to you because it’s your money.

Getting a large tax refund should be considered inefficient tax planning since a (large) refund implies you paid more tax than you really needed to and it’s reconciled as part your tax return. Instead of making you money or you making advancements on your financial plan, the government keeps your money and makes interest on it.

To reduce your payroll deductions, as one tax source, you can consider filling out the Government of Canada form T1213 Request to Reduce Tax Deductions at Source and send the completed form to your nearest CRA tax centre.

You can read more here.

The government will then send you an approval to reduce your withholdings (if you qualify), which you should send to your employer’s payroll department. Depending on the amount, you could see a significant increase in your take-home pay.

2. Pay off any outstanding credit card bills

We should all know by now that long-term credit card debt can be financially crippling. If you have outstanding debt on your credit cards – a very responsible thing to do is to kill that off. Paying down higher interest debt sooner than later should save you money.

3. Make a dent on your mortgage

You can’t beat the guaranteed rate of return of paying down your mortgage. We no longer have a mortgage but I would consider this option if I still had one. 🙂

Mortgage free!!! Now what???

Going further, I will say that if you generated your tax refund thanks to your RRSP contribution then making a lump-sum mortgage payment with this refund isn’t a bad decision – but there are other options including ensuring you reinvest that RRSP-generated tax refund. Read on in #5.

4. Contribute to your TFSA

Before we consider the RRSP contribution, passionate readers will know we try to max out our TFSAs as much as possible every year – it’s the account we tackle first.

I’ll continue to maximize my TFSA first because…

The TFSA contribution limit increased in 2024, to $7,000….so if you were aged 18-plus in 2009 AND have never contributed to a TFSA AND have been a resident of Canada from 2009 onwards, you’ll be able to contribute up to $95,000 in 2024. While contributions to a TFSA are not tax deductible, growth in the account is typically tax free (including interest, capital gains and dividends), and you can withdraw funds at any time with no penalty or tax to pay. This makes the TFSA an ideal retirement planning account. 

5. Contribute to your RRSP

If you need to boost your retirement savings then increasing your RRSP contributions (to the max) could be an ideal choice. The longer you save inside the RRSP the more you benefit from tax-deferred growth.

And…in making your RRSP contributions you’ll also receive a tax benefit since your contributions will reduce your taxable income. Just be sure that you have sufficient RRSP contribution room, otherwise you may have to pay overcontribution penalties.

Just be mindful that any RRSP-generated tax refund is usually best to be reinvested. 

You don’t have to take my word for it.

From David Chilton, The Wealthy Barber himself, who mentioned this:

“If you’re going to put money in a registered retirement savings plan and “blow the refund on something stupid,” then a major advantage of the RRSP – the immediate tax benefit – is lost, he says.”

Perfectly and bluntly put!

Using RRSPs as part of your retirement plan can make great “cents” for almost every investor but it’s the RRSP-generated tax refund that you need to save and/or ideally reinvest. 

6. Contribute to your FHSA

Last April, rules governing the then new FHSA program came into force, like I mentioned above as a new vehicle meant to help Canadians save for their first home. The program allows prospective homebuyers to start saving for up to 15 years once they open an account, with an annual $8,000 deposit cap and a lifetime contribution limit of $40,000.

Canadians who’ve opened this type of account will receive a new T-slip called the T4FHSA, which will provide the details needed to complete your tax return.

You can consider putting any tax refund into the FHSA this year along with any other savings found during this year as well to juice your contributions.

7. Top up your emergency fund

If you don’t have an emergency fund, yet, or want to pad that a bit more thanks to higher interest rates these days, then consider this option. Without an emergency fund, a large, unexpected expense or job loss could hamper the best-laid plans.

Assuming you have an emergency fund in place, pick any other option. 🙂

8. Contribute to RESPs

If you have kids and you’re striving to save money for their post-secondary education, an RESP could be an ideal option. You’ll receive up to $7,200 in lifetime government grants, and the savings grow on a tax-deferred basis. 

9. Invest in you

Do you have dreams beyond your existing role at work? If so, then consider using your return to invest in yourself. This is an especially good idea if it will help to boost your income in the long run.

10. Ya, treat yourself if you want!

Life is short, so if you’re paying down debt (or you’ve already killed your mortgage like we have), if you have already invested inside your TFSAs, RRSPs, RESPs and you’ve got your emergency fund in place – well, maybe going to Costa Rica isn’t a bad idea either. 🙂

When it comes to tax planning my advice is: don’t assume a big fat tax refund every year is a good thing.

If you’re always looking forward to the juicy refund it simply means the government kept some of your money and you could have had it working for you instead throughout the year.

What are you doing with your tax refund this year? 

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

8 Responses to "Smart ways to manage your tax refund"

  1. I have a very large refund this year but that was due to deferring my RRSP contributions from previous year to this year as I was mat leave (and in the lowest tax bracket) for the 2022 tax year. So, it made better tax sense to deduct them for 2023 and it paid off (pun intended!). All of it will be going into mortgage prepayment to get the balance as low as possible before our renewal in October.

    In the past, I would usually use $100-$200 to splurge on something that I’ve had an eye on and put the rest into my TFSA. It’s all about balance!

    Reply
    1. You know, I didn’t include that nuance but that can make sense KC – ensuring your include RRSP contributions to offset the highest tax year.

      You comment about balance is very important! Trying to do more of that myself!

      I appreciate the comment,
      Mark

      Reply
  2. I agree having a big refund is giving the government an interest free loan. I like to have that the other way around so my goal is to owe CRA money come tax time. Although, to win the game you can’t owe more than 3k or CRA will require extra tax instalment payments throughout the year. I am lucky to have my kids tuition deductions to off set some of my taxable investment account gains. Once those deductions are not around I will have to up my withholding tax to keep under that 3k number.

    Reply
  3. This year I’m using my refund to finish off paying on a line of credit that we had to dip into (Not the one we use for investing).

    Our mortgage renews in June 2025 so I’ll be redirecting those line of credit payments into the mortgage, and my wife’s car loan is wrapped up in October – those too will go on the mortgage. We’ve also been investing in a non-registered account outside of our HELOC investments and I’m prepared to put a good portion of that against the mortgage as well.

    Ideally, we’ll get our mortgage below $100k by renewal and get it very close to paid off by the end of 2027. Retirement currently planned for end of school year 2027-2028.

    Reply
    1. Great stuff, James…happy for you to have your mortgage done. As someone that has no debt right now, I will tell you, it’s VERY liberating!!

      That said, we might have a small car loan in the coming months but hope to pay off any new PHEV in 1-2 months.

      Continued success to you!
      Mark

      Reply
  4. My daughter wrote me last night that she booked a trip to Ecuador with her tax refund. I say good for her. You are only young once and she is very financially responsible, and definitely deserves a treat.
    I won’t be even filing for another month, but at my age refund or payment is no difference.

    Reply
    1. Great stuff. I have no issue with that since I’ve done that myself in past, just not Ecuador yet but it’s on my list! 🙂

      Thanks for your valuable comment and perspective.
      Mark

      Reply

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