The nice thing about NETFILE is that if CRA owes you a refund, you can expect to receive it by direct deposit in about eight business days. I owed the CRA a bit of money this year but my wife got a big refund and we wondered what to do with it. Jon Chevreau writes in The Financial Post that a lot of Canadians will face a similar decision – more than half of 25 million tax payers can expect a refund averaging $1,382 – and offers some ideas:

  • Pay down Consumer Debt: Probably the best option for those carrying credit-card or other high-cost debt is to use the refund to pay it down.
  • Pay down the RRSP loan: People who borrowed money to contribute to their RRSP should use the refund to pay down the RRSP loan.
  • Contribute to Your RRSP: If the big refund is courtesy of a last-minute RRSP contribution, the refund can be used to start a virtuous cycle – get a head start on RRSP contributions for the current year.
  • Pay down the Mortgage: The conventional advice is to use the tax refund to pay down the mortgage. Another option is to repay other low-cost loans.

We ended up picking the last option and paid down an investment loan.

This article has 21 comments

  1. CC, do you use a HELOC to invest also?

  2. Pay your taxes with it! I use my rebate to help pay my City Taxes on my house (and a little bit the insurance costs on my house).

    Then the money I haved saved to pay for those can go somewhere else… oh darn, now I have to plan that one…D’OH!!!

    –C8j

  3. Canadian Capitalist

    FT: On rare occasions, I use the line of credit as a liquidity tool. But, I pay it down immediately. As a matter of fact, I had taken out this particular loan expecting this tax refund :) Don’t worry. I am not going to start singing the benefits of leverage :)

  4. CC, what do you mean by using the LOC as a liquidity tool? Do you mean to purchase stocks when they appear cheap? Then pay back the balance later?

  5. I took out a HBP loan from my RSP. So every year I put enough money from my tax return into my RSP to cover my HBP repayment for the next year. The rest of the refund goes into my emergency savings fund.

  6. Mr. Chevreau mentions, but only briefly, that this “refund” is really an interest-free loan to the Feds. Rather than loaning the 110/mth for free to the Feds and getting it back at year end, figure out WHY you’re getting a refund (which deductions) and adjust your withholding tax as appropriate.

    2 common ways are the T1213 form (Child care, RSPs, etc..):
    http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html

    Or the standard TD1: (Tuition, Age, spousal amount)
    http://www.cra-arc.gc.ca/E/pbg/tf/td1/README.html

    Then, take that extra amount and have compounding work FOR you with your money. Obviously it’s hard to estimate and account for every deduction (donations, transit passes, etc etc..) but it can be worth the exercise.

  7. Canadian Capitalist

    Jon: That’s exactly why my wife had a refund (both child care deductions and RRSP contributions). She has a new job now and of course, we have the TD1 updated.

    Chuck: Starting next year, you can put your tax refund in a TFSA and use it as an emergency account.

    FT: Yes, I borrowed money to buy equities earlier in the year (mostly BMO and RioCan). I do it very rarely and immediately pay down the loan. The last time I did was in Nov. 2006 when income trusts became cheap.

  8. this is one year where I didn’t re-contribute it. I bought a big screen tv. I need some fun in life as well!

  9. CC, do you hold those income producing investments in a non-reg account?

  10. Canadian Capitalist

    FT: Yes, both BMO and RioCan are held in taxable accounts.

    Don: Of course, a balance is required between spending and saving. As long as long-term goals are being funded, there is no harm in having some fun. And, I can attest to the fact that watching Hockey Night in Canada broadcasts in HDTV is a very nice treat :)

  11. I don’t have any debt or a mortgage and make RRSP contributions biweekly, so my refund is just going into general savings. At some point it’ll either be used to buy a car or (part of) a house.

  12. I’m in the same boat as Aleks. I kind of wished that they kicked in the TFSA for THIS year, so I could put my return somewhere that it won’t add to my tax burden. To compound my dilemna even more, my condo is already jam packed full of stuff that I don’t use much. So, I don’t even know what kind of “stuff” I would buy with my excess cash. I generally like to blow my cash on vacations, but I just started a new job and my vacation time won’t kick in for a while.

  13. Aleks and Phil, what about using it (or some of it) to make charitable donations? I set myself an increasing target each year for charity, and given that the tax refund is income I hadn’t planned on having, I sometimes end up donating it. That can help reduce your tax burden while contributing to causes or organisations that you care about.

  14. CC,
    Let me add my two cents before you use your tax rebate to prepay your mortgage. When you prepay your mortgage, this investment gets riskier and riskier. Consider this, the more equity you put into that house, the greater chance that you won’t see those dollars in the future. What if you need the money? Keeping the equity separate from your house will be the safest position you can be in. Your house was made to shelter people, not money. Check out http://www.stewardsofwealth.com/ for alternative ways to create wealth. What you’ll find is that the rich don’t do things a little different than the poor and middle class, they do the complete opposite. Keep it goin’ CC!

  15. Canadian Capitalist

    sow: How so? This is the first time I’ve heard someone say that pre-paying their mortgage is a riskier option. I couldn’t care less what the rich do; I try and do what’s best for my situation and for my circumstances and that’s how I believe everyone should.

  16. I disagree with sow. Of course if you have immediate need for the money, prepaying your debts is rather silly. Everyone who can afford to ought to maintain a certain amount of “safety funds” in liquid investments to avoid having to take on credit card debt, refinance a mortgage or sell longer term investments in order to pay for an emergency. Otherwise prepaying debts is a reasonably good option since it pays a tax -free return (unless you get a tax credit for the interest) equal to the interest rate on the loan. By prepaying now, you generate cash flows when the debt is finally repaid with a present value equal to the amount you prepay. A property does not get more risky as one pays down the debt. If it is a house or condo you inhabit, it continues to generate payments to you equal to the rent you would have had to pay if you didn’t live there. Furthermore, as the less of the value of the property is owned by the mortgage lender, in theory it becomes easier to refinance or change the terms of the mortgage if the need arises.

  17. I’m partially with sow and partially against.

    He seems to be advocating using ‘extra’ money to invest to create cash flows. If you’re doing this while you have debt, then you are by default using leverage to invest.

    Pros:
    1) If the investment pays a greater after-tax rate than the debt costs, then you get ahead.
    2) Most investments are more liquid than your house, so you have better access to the money if needed.
    3) Putting all your money towards paying off the mortgage instead of investing elsewhere means you are not diversifying. I think this is where sow is seeing the risk.

    Cons
    1) Contra pro 1, the alternate investment either won’t have a higher after-tax rate of return or won’t be gauranteed. Paying off mortgage is very safe this way.
    2) As mentioned, you are leveraged as long as you have debt and thus are taking on risk.
    3) If your house does fall in value and you become ‘underwater’ then refinancing could be impossible.

    Personnal Assesment
    1) If you have a large mortgage/long amortization, throw as much money at it as you can (assumes you have a significant cash reserve).
    2) If your mortgage is getting smaller, consider diversifying into other investments. I suggest avoiding rental properties as you’re still investing in real estate.
    3) Like CC, who care what the rich do. They can afford to lose big bucks on risky ventures gone bad.

  18. Canadian Capitalist

    Al: I agree with your list and your opinions. Rob Smith, commented elsewhere that a good thumb rule to follow would be to have home equity and other investments roughly equal. I think that’s a good thumb rule to follow provided mortgage debt can be comfortably carried.

  19. Jon202, which form would you use to claim the Transit Pass deduction? It’s not an option on the T1213 or the TD1.

  20. Hi CC. I am a newly minted Canuck and appalled at my tax bill. Most of my investments are foreign (obviously, since I moved here last year) and I only just realized that what would’ve been a fat refund got eaten up by taxes on my foreign dividends. So what kinds of mutual funds or ETFs do you keep in taxable accounts? Any recommendations? Thanks.

  21. Canadian Capitalist

    pessimist: I keep Canadian stocks in taxable accounts to take advantage of the dividend tax credit. But the #1 priority for us after contributing to the RRSP is paying down the mortgage.

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