Financial Perspective – What to do with your tax refund?
After tax season, here comes… tax refund season. What might be a good thing to do with this little windfall?
Every year, millions of Canadian taxpayers receive tax refunds. This is their repayment for the excess tax they paid to the government during the year, after factoring in the tax credits or programs they qualify for and the deductible contributions they’ve made, such as registered retirement savings plan (RRSP) contributions, for example.
In the past year alone, between February 8, 2024, and January 27, 2025, the federal government reports having paid close to $44 billion in tax refunds to some 19 million Canadians. That works out to an average refund of $2,295.
If you are one of those taxpayers, here are five ideas to consider for making the most of your refund.
- Repay your most costly debts
Borrowing money for consumer purchases can end up costing a lot in interest and, unlike a student loan, mortgage or business start-up loan, consumer debt is not a lever for building assets. Unpaid credit card balances top the list of debts to avoid due to their often hefty interest rates. The first thing to do with your tax refund might be to pay down your costly debts, especially those you can’t deduct from your income (which is generally the case). - Reinvest in your RRSP
One of the most profitable long-term strategies can be to immediately re-invest your tax refund in your registered retirement savings plan (RRSP), providing you have enough contribution room. As the following example illustrates, this reinvestment could generate a substantial amount of additional retirement capital thanks to compound returns over many years…