Yahoo Finance Taxes 2024: Invest or splurge? What to do if you get a big tax refund
More than 3.9M Canadians received an income tax refund between Feb. 8 and March 18 with an average value of $2,134
With tax season in full swing, many Canadians who are set to receive a return may be wondering what to do with that government cheque.
According to Statistics Canada, more than 3.9 million Canadians received an income tax refund between Feb. 8 and March 18 with an average value of $2,134. So, with that extra $2,000 in your pocket, is it time to buy that new TV you had your eye on, or be more prudent with the money?
Ryan Gubic, a certified financial planner and founder of MRG Wealth Management, says a tax refund can help jumpstart your financial goals for 2024.
“The tax return sometimes can be a great catalyst to think about the overall plan and all the different components of their financial life,” Gubic said in an interview with Yahoo Finance Canada.
What the best course of action is for Canadians who receive a sizeable refund this year will largely depend on individual financial goals. Gubic says it’s important to note that everyone’s financial goals are different, so there’s not one answer for where the money should go. Regardless of what your financial goals are, a portion of your tax return refund should be aligned with those goals, he says.
“Go back to your plan and go back to your vision,” Gubic said. “When I talk about vision with Canadians, it's what are you working towards what's success looks like for you.
“If they have a high interest rate on their mortgage right now, and one of their milestones or goals is to pay off their mortgage by a certain amount of time, using some or all of that tax refund as an additional payment towards your mortgage can be really beneficial.”
Use your refund to tackle debt and build up savings
Wendy Brookhouse, a certified financial planner and CEO of Black Star Wealth, suggests Canadians spread their refund across a variety of accounts. But the first priority should be tackling outstanding debt. Consumer debt in Canada has surged amid higher interest rates, hitting $2.4 trillion in the fourth quarter of 2023, according to a recent report from TransUnion. After paying down debts, Brookhouse suggests a top-up of emergency reserves.
“If something happens to your job, if you become sick and couldn't work … you have the money in cash (so) that you don't have to actually incur additional credit card debt or line of credit debt to fund certain aspects,” she said.
Next, she would add money to the First Home Savings Account (FHSA) for those looking to buy their first home, and into a Registered Retirement Savings Plan (RRSP) for those already with a home or not in the housing market. Brookhouse says the FHSA should be the first priority for those eligible to contribute, in part because there’s an annual cap of $8,000. Both the FHSA and RRSP have the benefit of contributions being tax deductible, which can help ensure a taxpayer gets a return again next year.
Finally, she would consider adding money to a Tax-Free Savings Account (TFSA), which is easily accessible and where any income earned in the account is tax-free.
“That money will grow without paying tax on the growth and you can take it out tax-free when you need it,” she said.
Is it okay to use your refund to splurge?
It may be tempting to take your refund and spend it on something you've been thinking about purchasing. Brookhouse says if someone doesn’t have any high-interest debt and has plenty saved in an emergency fund, making a fun purchase with that tax return is OK.
“If either of those are not full up, I would minimize the splurge to a smaller percentage, because a splurge is immediate,” she said.
“Make sure your financial foundation is very, very strong before you increase the allocation to the splurge.”
Gubic says it can be a good idea to use a tax return for those big necessary purchases, such as home renovations or new tires, but Canadians should be planning for these purchases beforehand, rather than relying on a big return to afford them.
Think ahead to next year
If you are among the Canadians receiving a meaningful refund, Brookhouse suggests speaking with your employer to adjust your tax deductions to ensure you don’t actually receive a big return again next year.
“If we think about it, a tax refund means we have lent money to the government, at zero per cent interest,” she said.
“What we are going to do — or recommend to do — with the refund, you could be doing that all-year long instead.”
Ultimately, Brookhouse believes you’re better off with that extra income in your pocket throughout the year. For example, more money in each paycheque can make it easier to tackle that looming debt.
“If you're actually able to increase your (debt) payment throughout the year, you could potentially reduce the amount of interest you're paying by doing bigger payments every month, as opposed to one big payment when you get your tax return back,” Brookhouse said.
Ben Cousins is a freelance journalist based in Toronto. Follow him on Twitter @cousins_ben.
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