10 Smart Things to Do with Your Canadian Tax Refund

Getting a tax refund from the Canada Revenue Agency (CRA) can feel like you won the lottery, or seem like free money. But keep in mind that this is your money; it's definitely not free, since you worked so hard for it. Your refund is money coming back to you after you overpaid income tax throughout the year. Before you spend it all on something that offers immediate gratification (we see you sun and sand), it's worth thinking about how that cash can help your long-term financial goals.

Here are 10 smart ways to use your tax refund if you're focused on building financial stability and future wealth. And it doesn't need to be all or nothing; you can allocate some money for fun, and some for your future.

1. Build or top up an emergency fund

Put some money aside for the proverbial rainy day. A healthy emergency fund gives you peace of mind for unexpected expenses like car repairs, medical bills, or job transitions. While many financial experts say to aim for 3-6 months of basic living expenses parked in a savings account or Tax-Free Savings Account (TFSA), we know that that can be a lofty goal. Some cash put aside, combined with a small personal line of credit can help to ride out a short period of instability.

2. Boost your savings

If your emergency fund is already solid, consider putting part of your refund into longer-term savings — perhaps for a vacation, a down payment on a home, or a future project. Splitting your refund across different savings goals can help you stay balanced. Consider which savings vehicle might be right for your goals, whether a First Home Savings Account (FHSA), a Tax-Free Savings Account (TFSA), or other registered accounts.

3. Pay down debt

Chances are if you didn't have that emergency fund that we mentioned higher up, you may have footed the bill for big expenses with debt like a credit card, or line of credit. High-interest debt can cost you far more over time than you earn in savings. The compounding of interest on those debts can also make them difficult to pay off, because they just keep getting bigger and bigger. Using your refund to reduce or eliminate high-interest balances can improve your monthly cash flow, your credit score, and reduce stress. Tackle your highest interest debts first, then move on to lower interest debts.

4. Contribute to your RRSP

A Registered Retirement Savings Plan (RRSP) contribution not only helps you save for retirement but can also reduce your taxable income — potentially increasing future refunds if timed right and in a higher tax bracket. It can also be used as a savings vehicle for a home, allowing you to borrow up to $60,000 for a down payment for your first home from the account. Combined with an FHSA, a home of your own could be more in reach than you think.

5. Invest with a TFSA

A Tax-Free Savings Account (TFSA) is one of the most flexible Canadian investment vehicles. Money you earn inside a TFSA — whether from interest, dividends, or capital gains — grows tax-free, and withdrawals aren't taxed either. A refund can be a great way to start or top up your TFSA.

6. Invest in skills & career growth

Use your refund to pay for courses, certifications, conferences, or professional development that could help you earn more or advance in your career. Tuition for approved post-secondary institutions that are over $100 are eligible for the Tuition Tax Credit.

7. Reduce your mortgage balance

Canadians can expect to pay between approximately $200,000 and over $450,000 in total interest on a typical 25-to-30-year mortgage. The amount is dependent on the principal amount of the mortgage, the prevailing interest rates, and amortization period. At a 5% rate, a $500k mortgage costs over $220,000 in interest over 25 years. If you own a home, making an extra mortgage payment can reduce interest costs and shorten the life of your mortgage — a big win if interest rates are high. Owning your home sooner could potentially mean that you can retire earlier.

8. Start or grow a side business

Thinking about launching a side hustle or scaling one you've already started? Your refund can be seed money for inventory, marketing, software tools, or initial operating costs. Owning a business can be great for your bottom line, but also opens up a whole host of tax advantages.

9. Make home improvements

Have you been dreaming of a chef's kitchen or a backyard oasis? This could be the time to undertake some upgrades to your home. Focus on upgrades that add property value or lower ongoing costs (like energy-efficient windows or new insulation). Even modest renovations can improve comfort and future resale value. Certain upgrades for accessibility may be eligible for credits through the Home Accessibility Tax Credit.

10. Insure your future

Whether it's critical illness or life insurance, allocating some refund dollars toward protection can safeguard your income and family's well-being, should something happen to you. Life insurance payments are tax-free to the beneficiary, and can help to cover expenses, pay off debts, and provide financial security to your dependants.

Final Thoughts

We know that a trip to that all-inclusive can offer up some short-term fulfillment, but the feeling you get from knowing that you are working toward a secure financial future can also be pretty great! Investing that refund can be a good place to start. Getting a refund simply means you overpaid tax during the year — the CRA is returning your own money. If you do get a large refund every year, you may wish to adjust your withholdings so you keep more each paycheque instead of waiting for a lump sum every year.

Tips for Canadians

• Your average refund can vary widely from person to person, but many Canadians receive one each year if deductions and credits exceeded amounts withheld at source.
• In Canada, you can check your refund status online through your CRA “My Account.”

Consider using TurboTax to file your refund. TurboTax finds every tax deduction and credit that you qualify for to boost your tax refund (or get you the lowest tax payable.). A tax expert can even review your taxes before you submit or do them completely for you.