TORONTO, April 11, 2013 /CNW/ - With the tax return deadline approaching on April 30, some Canadians may already be happily receiving refunds, while others are disappointed because they have to pay. Regardless of your situation, there are investing decisions that you can make to help reduce the overall amount of tax you have to pay.
For many Canadians, tax season means a lump sum of money: according to the Canada Revenue Agency, the average refund in 2011 was $1,580. The amount of tax paid annually by Canadians depends on several factors, including income, place of residence and deductions.
"Many Canadians think of a tax refund as a bonus, even though it's your own money to begin with," says Cynthia Caskey, Vice President, Sales Manager & Portfolio Manager, TD Wealth Private Investment Advice. "It can be tempting to splurge on luxury items, but many Canadians need to balance paying debt, saving for a child's education, and for retirement. It's important to consider these needs when deciding how best to spend your refund."
For Canadians who are eager to spend their refunds, Caskey offers the following suggestions:
- Pay down high-interest debt: This can include outstanding credit card balances, and should be your top priority. Consider making a lump-sum payment, especially if the interest on the debt is not tax deductible.
- Save for a child's education: You can contribute to a child's Registered Education Savings Plan (RESP), which will also potentially qualify them for a Canada Education Savings Grant (CESG). The plan will earn tax-free investment income on both your contribution and any government grants. Grandparents may consider opening a family RESP plan, which can have multiple children as beneficiaries.
- Create a flexible savings strategy: A contribution to a Tax-Free Savings Account (TFSA) can be part of your retirement savings strategy, and interest earned and investment income is not taxed. Because you can withdraw the funds at any time, it is a great option for use as an emergency fund. A good rule of thumb is to have at least six months of living expenses set aside for contingencies.