What To Do With Your Tax Refund

Depending on who you are, tax season can be a very stressful time of year, or it can be a very enjoyable time of year if you are receiving a tax refund. A tax refund, sometimes known as a tax return is the government refunding you the money that you overpaid in taxes throughout the year. The money that you receive in your tax refund is your money, it is not a benefit or financial assistance from the government, so use it wisely. In this blog, we will be looking at what to do with your tax refund in Canada, we will show you wise ways to save, or use your tax refund in a wise way that will be beneficial for your finances and your financial plan.

In this article: 

• What is a tax refund?
• Best way to use your tax refund
• Pay off your debts 
• Start a Tax-free Savings Account (TFSA) for yourself
• Open a Registered Retirement Savings Plan (RRSP)
  • The Home Buyers’ Plan (HBP)
  • The Lifelong Learning Plan (LLP)
• Save for your child’s education with a Registered Education Savings Plan (RESP)
• Purchase life insurance
  • What is critical illness insurance?
  • What is disability insurance?
• Frequently Asked Questions (FAQs) about using your tax refund in Canada

What is a tax refund? 

A tax refund is basically the refund that the government gives you because you paid too much income tax in the last year. You typically will get different tax forms such as a T4 slip from your job, or other tax slips from financial institutions, as well as from other organizations like charities. These slips are used to calculate how much income tax you are paid and also how much of a refund you are entitled to. Remember that a tax refund is not a benefit from the government, nor is it an act of kindness from the government. Rather, the tax refund is money that you overpaid, thus your tax refund is the money that you are rightfully entitled to get back. 

Best way to use your tax refund

There are plenty of excellent ways to use your tax refund in beneficial ways that will help you in the future. Though it might be exciting to get a large sum of money that you didn’t expect, just know that this is the money that you overpaid throughout the year in taxes. This being said, make sure that you use your money wisely. There are plenty of great ways to use it, we recommend that you use it for: 

• Paying off outstanding debts
• Opening a Tax-free Savings Account (TFSA)
• Open a Registered Retirement Savings Plan (RRSP)
• Begin saving for your child’s education with a Registered Education Savings Plan (RESP)
• Purchase life insurance

Pay off your debts 

Debt can feel like a weight on your shoulders. It is one of the biggest risks to one’s financial freedom these days. With the rising costs of living happening all across the board in Canada, it is very common that most Canadians have some kind of debt. In fact, Canadians owe an accumulated amount of $2 trillion dollars in debt, with mortgage debt accounting for most of it. Something as major as mortgage debt, to something minor like car payments or credit card debts, are equally as important in making sure that you stay on top of your debt payments. Having good credit is essential in day-to-day life in Canada. You require good credit to get a mortgage, get a loan, get a credit card, and even a phone plan in some cases! 

If you receive a tax refund whether it is small or large, put it towards some outstanding debts or bills just to ease the financial burden you might have. No matter the amount, it is best to get debt out of the way first before you jump into starting to save up for your future financial plan. Although it is always good to save, try to set a budget that works for you where you can cover your debts, your living expenses, and bills and then save the remainder. To set yourself up for a better financial future we always recommend that you contact an experienced financial advisor to help guide you through your future financial decisions.

Start a Tax-free Savings Account (TFSA) for yourself

A Tax-free Savings Account (TFSA) is an essential savings account for all Canadians to open. This is one of the most beneficial savings accounts as it can generate income for you completely tax-free, the contribution room grows annually, and also you can withdraw your money whenever you want! 

You can open a tax-free savings account at most financial institutions all you will need is a Social Insurance Number (SIN) and you must be a Canadian resident. Putting your tax refund towards a TFSA is beneficial because you can accumulate interest or if you want you can pair it with various forms of investments that can provide income, and have different levels of direction (investments managed by yourself or by your financial institution).  

The investments that you can make with a TFSA include: 

• Guaranteed investment certificates (GICs)
• Mutual funds
• Exchange-Traded Funds (ETFs)
• Stocks
• Bonds

*When your money is invested in a TFSA, you will not be charged taxes on any income earned, interest made, or managerial fees because the TFSA is tax-sheltered. 

When you start a TFSA, you will not be held to any timelines regarding when you can withdraw your money or deposit your money. A TFSA will allow you to withdraw money whenever and deposit money whenever. Of course, there are some rules though that you must be aware of such as making sure you’re not surpassing your yearly contribution room or your total contribution room either. You should also know that it is a good idea to keep track of your deposits and withdrawals just to avoid any unnecessary contribution issues. 

Starting a TFSA is a great way to get your savings started or supplement your existing savings accounts. This essential savings account is useful for day-to-day savings, emergency funds, or for short-and-long-term investments. Consider beginning a TFSA with your tax refund by contacting a financial advisor today and figuring out how it can help you and your financial plan. Also read about the 7 Reasons to Have a Tax-Free Savings Account (TFSA). 

Open a Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan (RRSP) is a great account for reducing the amount of taxes you pay year over year, but also it is a great way to help you save up for your retirement. The RRSP is a tax-advantaged retirement savings plan that is established by you at a financial institution. You contribute to the RRSP throughout your life and once you retire you convert it to a Registered Retirement Income Fund, purchase an annuity or make a lump-sum withdrawal to access your savings. You can also make withdrawals from your RRSP to purchase your first home or for education. 

The amount that you can contribute to your RRSP annually is decided by the government but does change some years. The maximum contribution limit can also be capped at 18% of your income, or the decided yearly contribution limit, whichever is lower. Luckily, the RRSP is a tax-deductible savings account which means that however much you contribute towards your RRSP can be deducted from your annual income. This tax-deductible feature is one of the most attractive features of the RRSP because this means you will pay less in taxes, the more you contribute to your RRSP, due to the fact that you can claim it on your income tax return. 

Aside from tax-deductible benefits, the RRSP can be used as an investment vehicle that will allow you to invest in ETFs, GICs, mutual funds, stocks, bonds and more. Using your tax refund towards contributing to your RRSP would be extremely beneficial because of the fact that you will be able to deduct that amount from your income when filing taxes next year. Saving for your retirement is one of the most important financial decisions to make and unfortunately, there are many Canadians who are not well prepared for retirement. Small contributions to your RRSP will grow into large savings over time if they are invested properly and will be beneficial for your retirement and before you retire if you use your funds towards the Home Buyers’ Plan (HBP) or the Lifelong Learners Plan. 

What is the Home Buyers’ Plan (HBP)?

With the HBP, people can withdraw up to $35,000 from their registered retirement savings plan, or RRSP, or potentially $70,000 for couples, Canadian homebuyers are allowed to increase their down payment under the Home Buyers’ Plan. Participants who are purchasing or building a home for a family member with a disability may also use the HBP. Best of all, the money is withdrawn and used towards the home completely tax-free, so long as you can return the HBP money to your RRSP within 15 years.

How to be eligible for the Home Buyers’ Plan (HBP)

• Be a Canadian citizen.
• Possess an RRSP with enough money in it to withdraw.
• Buy a house for the first time. 
• You are deemed a first time home buyer
• In the four years prior to starting the HBP, “you did not occupy a home that you owned or one that your current spouse or common-law partner owned,” according to the Government of Canada website.
• Be a recurring customer when buying or constructing a home for a relative who has a disability.
• Within a year of building or purchasing the home, you should intend to use it as your primary residence.
• Have a written contract in place before purchasing or constructing a home for oneself or a disabled relative.
• Plan to buy a house that qualifies and is located in Canada. The majority of residences, including condos and apartments, are eligible. Even though co-op housing isn’t always eligible, there might be some exceptions.

How does the HBP work?

You can withdraw up to $35,000 tax-free from your RRSP after receiving approval for the Home Buyers’ Plan. Couples may withdraw a combined $70,000, or $35,000 each.

The HBP does not permit the withdrawal of RRSP funds unless they have been in the account for at least 90 days. To purchase or construct a home, you have until October 1st of the year after your withdrawal.

Additionally, you have to take money out of your RRSP no later than 30 days after getting the deed to your new house. You have one calendar year to make all of your HBP withdrawals.

What is the Lifelong Learning Plan (LLP)?

The Registered Retirement Savings Plan (RRSP) has a benefit that is referred to as the Lifelong Learning Plan (RRSP). The plan permits RRSP contributors to temporarily withdraw up to $20,000 from their accounts tax-free in order to pay for their own or their spouse’s or common-law partner’s education. Limitations apply to the provision, including a $10,000 annual withdrawal cap and a 10-year maximum repayment period after which the ability to contribute the borrowed amount is lost.

How does the LLP work?

You can borrow up to $10,000 per year from your RRSP under the Lifelong Learning Plan (LLP), up to a maximum of $20,000 over four years, to help pay for full-time education expenses. Your place of attendance must also be eligible for the programme. This programme can be used to pay for your own or your spouse’s education, but not your kids’.

By the second year after you stop attending full-time school or the fifth year after you make your first withdrawal, whichever comes first, you must begin repaying the money you borrowed from your RRSP.

You have up to 10 years to repay the entire amount, but you must pay back at least 10% of what you borrowed in the first year of repayments. Unless you satisfy both of these requirements, you will be taxed on the money you withdrew.

Save for your child’s education with a Registered Education Savings Plan (RESP)

If you’re someone who is a parent or a guardian and would like to save for your child’s future, it is a great idea to begin a Registered Education Savings Plan (RESP) for their future education. Saving for a child’s future education is an amazing way to give them a financial kickstart in young adulthood. Therefore the RESP is one of the most beneficial ways to use your tax refund, this is based on the fact that you will get a contribution from the government based on how much you contribute to the RESP, but also because an RESP is essential savings account for your child. 

Basically, an RESP is an education savings account, like the TFSA and RRSP, is tax-deferred. As a result, any capital gains, interest, and income earned on the account are tax-sheltered until withdrawn. This is perfect since the RESP account can contain investment options such as mutual funds, ETFs, GICs, equities, and bonds.

The Registered Education Savings Plan (RESP) account is unique in that the Canadian government can provide grants and bonds to your child’s RESP account. The Canada Education Savings Grant (CESG) provides grants of up to $7,200, whilst the Canada Learning Bond (CLB) provides grants of up to $2,000 for RESP accounts for children from low-income households. To open an RESP, you need to contact an investment planner and we can help you set up the right RESP for you, along with that you must have your Social Insurance Number (SIN), your child’s SIN, as well as your child’s birth certificate. 

A lifetime total contribution maximum of $50,000 can protect your child’s future educational plans, and government programs such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are government contributions that can assist build the savings year after year.

There is no yearly limit to how much money you can put into the RESP, but it is worth putting in $2,500 because the government will match 20 percent ($500) of your contribution that year. This is not required, and you can claim up to $1,000 in grants per year, so if you are unable to contribute $2,500 to the RESP each year, there are alternative methods to save and get government benefits. You can contribute to the RESP for a total of 31 years, and the plan can remain open for 35 years!

Putting your tax refund towards an RESP is a great way to collect some of those government grants and bonds, but also it is ideal for saving for your child’s future. Payments to the RESP will lead to massive savings over time. 

Buy Life Insurance

Purchasing life insurance is a very important decision, but it is a crucial part of a financial plan to secure your family’s financial future. Even critical illness insurance and disability insurance are amazing types of coverage that can protect you and your family, while also giving you peace of mind in case anything unfortunate happens.

With your tax refund, purchasing a life insurance policy would be a step in the right direction to protecting your family’s wealth and your own wealth. There are life insurance plans to fit any lifestyle regardless of your medical conditions, your age, your citizenship status, or your socioeconomic status. There are great underwritten term life insurance policies out there that can give you complete coverage at an affordable rate, take a look at some of these term life insurance rates:

Male – non-smoker

Female – non-smoker

Life insurance might not be for everyone, but there are certainly great reasons why you should have life insurance. If you have children, if you have a mortgage you are working to pay off, if you have assets, if you have any unpaid loans, you should consider life insurance so that the financial burden does not affect your loved ones in the case of your death. There are great policies such as term life insurance, permanent life insurance and universal life insurance plans which are designed to both protect your finances in the case of your death and give you peace of mind. 

Check out the two types of permanent life insurance: universal life insurance and whole life insurance. 

What is Disability Insurance?

If you rely on your paycheque, protecting your income stream is one of the best decisions you can make. Disability insurance pays a portion of your income if illness or injury leaves you unable to work. It can give you tax-free monthly income to help pay expenses if an illness or accident stops you from working. Being too safe is never a wrong thing to do, especially being that the average 30-year-old Canadian has a four times greater chance of becoming disabled than they do of dying before age 65. 

Frequently Asked Questions (FAQs) about using your tax refund in Canada

Use your tax refund wisely 

Whether you want to pay off debts, start a new savings account or if you want to purchase a life insurance policy, make sure that no matter what, you use that tax refund wisely. The benefits of the RRSP, TFSA, and RESP are all great and we can help you with your financial planning to find out what savings account is right for you. 

We are also professional life insurance brokers and working with a life insurance advisor can help you find the right insurance policy for your needs and situation.

At Protect Your Wealth, we work with and compare quotes and policies from the best life insurance companies in Canada to help you find what you’re looking for. Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, including areas such as Aurora, Milton, and Markham.