http://www.digitaljournal.com/life/personal+finance/op-ed-seven-ways-to-wisely-spend-your-forthcoming-tax-refund/article/432068

Op-Ed: Seven ways to wisely spend your forthcoming tax refund

Posted Apr 29, 2015 by Igor I. Solar
With personal tax returns for 2014 due April 30, 2015, most Canadians have already submitted their returns and many have started the waiting period to receive a refund. Have you already formulated a plan on how to spend this seemingly free money?
Canadian dollar banknotes issued by the Bank of Canada are legal tender in Canada.
Canadian dollar banknotes issued by the Bank of Canada are legal tender in Canada.
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According to Canada Revenue Agency (CRA) close to 28.3 million tax returns were filed in 2014. About 58 percent of the returns filed involved a refund, and the tax agency paid out over $28 billion in refunds last year. The average refund in 2014 was $1,696.
Obviously the money received as a refund is always part of the taxpayer’s hard-earned income, but it is held by the government for several months as an “interest-free loan”. Thus, it is advisable to apply every reasonable and legitimate approach to minimize the amount held by the government on your behalf. Often it is possible to manage that fraction of one’s income, such as saving it and accruing some interest during the year. Therefore, it is better to retain control of a larger portion of one’s income and aim for a smaller tax refund.
However, after CRA is satisfied about the legitimacy of every reasonable deduction included in one’s declaration, if the taxes withheld are higher than the tax liability, a refund is issued (as long as your refund is over $2).
To some people this “income” may seem like free money, and as such it could possibly be spent in somewhat frivolous deeds. This is the time when a vacation comes to mind. Or perhaps purchasing a larger screen TV, getting an updated, “smarter” PC, or treating the extended family and a few friends to a fancy restaurant, and the like. That would neatly take care of just about any refund.
However, most financial advisors suggest that, unless you are already wealthy and eternally carefree, using your tax refund in ways that may generate future value, promote peace of mind, and bring you closer to financial freedom, may be a better alternative.
Here a seven approaches where you may direct your tax refund which should have a positive effect in your financial future and sense of well-being:
1. Make a lump-sum payment on your mortgage. Since your extra payment will go directly to the principal, this will reduce the amount of interest you pay in the remaining of your mortgage term.
2. Contribute to your Registered Retirement Savings Plan (RRSP). Your RRSP contribution will increase your retirement savings and allow you a tax deduction the following year. You could also withdraw up to $25,000 in a calendar year from your RRSP to buy or build a first-time home for yourself or for a related person with a disability under the Home Buyer’s Plan (HBP). You have up to 15 years to repay the amount you withdrew from your RRSP under the HBP.
3. Pay down outstanding debt. If you owe money to credit cards or bank loans, pay them as soon as possible. You will save on interest and sleep better at night.
4. Contribute to or set up an emergency fund. You may eventually face a period of unemployment or meet unexpected expenses. Even if you are self-employed, having put aside three to six months’ worth of your regular income you will be better prepared to afford hard times or emergencies.
5. Consider saving for an investment property. It’s unlikely that your tax refund will provide the necessary funds for the down payment on an investment property, but it could be a good start. Be consistent, and after a while you may be able to save enough, get a mortgage, buy the right property, and by applying the rental revenue to your mortgage payments, you will build a significant equity.
6. Improve your living space. Improving the efficiency of your home will always be a good investment. New windows, better insulation, a new furnace, or a bathroom upgrade will not only enhance your living space but also save you money on utility bills and improve the property value.
7. Reward yourself. If you have managed to adequately direct your tax refund to any of the options presented above you certainly qualify for a reward. You have made a smart financial decision and deserve a treat. Use part of your refund to buy yourself that gift you always wanted as a kid and did not get for Christmas. As long it is not a luxury car or a swimming pool!