What Will You Do with Your Tax Refund?

The CRA starts processing tax returns about the middle of February, so if you filed your tax return early, your tax refund probably somewhere in the works. You could see a cheque relatively soon. But have you decided what you will do with your tax refund? Here are some of the more popular uses for a tax return:

Pay for Something You Want Done

Many people use a tax refund as a way to pay for expensive things they want done. Whether it’s replacing carpet, upgrading the heating system in your home, or renovating the kitchen, a tax refund can get you well on your way. If you have been planning to make some changes to your home, your tax refund can be just the capital you need.

Buy Something Fun

Others want to buy something fun. A new laptop might be in order. A tax refund can make a pretty decent down payment on a car. Or, you could go on vacation. There are plenty of people who are interested in purchasing something fun with money that they see as a “windfall.” It feels like extra money, so it seems like spending it on something unnecessary is the way to go.

Save it for a Rainy Day

The more practically-minded are likely to save a tax refund for a rainy day. Boost your emergency fund with the money you get back. Put it in your car repair fund, or put it toward a bigger savings goal you might have, such as buying a house. You could also boost your RRSP contribution. A little extra now can go a long way once compound interest gets involved.

Pay Down Debt

If you have debt, the best use of your tax refund is probably to pay down debt. Debt is a serious drain on your wealth. You continually pay interest to someone else, and your resources aren’t entirely your own. Your tax refund can help you take a big bite out of your debt, saving you money now and in the future.

Do You Even Need a Tax Refund?

One of the questions that comes up, though, is whether or not you really even need a tax refund. I’ve written before that it’s fairly pointless to receive a tax refund. This is because when you have a tax refund, it usually means that you have been over-paying throughout the year. As a result, the government has been enjoying an interest-free loan. Unless you are eligible for a large amount of deductions and credits, the money you are getting back is really your own.

Instead of being used by the government throughout the year, that money could have been used for you, earning interest. You could have been using the money to make more money, rather than letting it sit in government coffers.

Of course, the other side is that some folks like to use a tax refund as a forced savings vehicle. It’s pretty automatic, so it results in savings that add up, and can then be used at tax refund time. But it’s still worth considering whether you even need the tax refund.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

11 Responses to What Will You Do with Your Tax Refund?

  1. If I get a tax refund, it will be going in my emergency fund/tuition fund/insurance fund. I have a lot of expensive things to pay for this year!

  2. Sometimes, it is difficult to control the tax refund. I do not have much control of how much money my employer is withholding for tax. I also do not want to let them know too much about my financial situation and my other sources of income. It is good to have tax refund, but it is better to owe CRA money because you know you are making more money than people expect you to.

  3. The government is taking too much of your currency, and they give back the extra after they have held it all year. Do they say sorry for taking too much, here’s some interest? No they tell you be happy we gave you some money back and didn’t take more. To each their own. I prefer to owe the government, that means I didn’t pay them enough, and no I will not pay interest either.

  4. My return will be helping to partially fund my parental leave to help take care of my wife and 2 children which I am currently on. I will be returning to work in July. The remainder will be to fund both child’s Registered Education Savings Plan (RESP) maximum matching contribution from the Canadian Government. No spending on ourselves. We used to use the return for renovations, major appliance replacements, or automobile maintenance. Now that those are in good condition and we have a maintenance fund, the tax return can be used for other things. The tax return easily covers our yearly contribution to the RESP fund with a little left over for emergency fund. I understand we would have the potential to earn an additional $300 if it was invested each month and will be considering it next year. Need to talk to payroll and have the tax adjusted appropriately.

  5. Buying a house is a great goal for the New Year. Make sure that resolution has some back up with a life insurance policy. You can get a quick and easy quote from IntelliQuote in just minutes. Find out how little it could cost to keep (and protect) that home for future generations. http://bit.ly/AhqPHY

  6. Mine will be going towards paying for my upcoming wedding. In fact, it might just pay for the entire wedding given how frugal I’m trying to be (as tough as that can be thanks to the crazy wedding industry).

  7. Due to some unexpected credits, I’m getting a huge refund (got it in Dec so I couldn’t even adjust my the TD1 in 2011 to reflect this) so 95% of it will go to my credit card debt knocking off 60% of my debt in one shot. The other 5% is paying for my glasses which I will get a reimbursement from my health plan in about a month which I will put that against my remaining debt. Win-win-win! 🙂

    • That is a great plan, eliminating debt is a key factor in gaining riches and living the life that you want to live. Kudos

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