MoneyFlex
By Alicia Tyler on May 1, 2024
Estimated reading time: 7 minutes
By Alicia Tyler on May 1, 2024
Estimated reading time: 7 minutes
Got a refund? Lucky you! Find out when you’ll get the money, what to do with your income tax refund and how to get more next year.
With the tax season in full swing (individuals had to file April 30 and self-employed have until June 15), you might be wondering about the processing time for tax refunds in Canada—and how to best spend yours. While the idea of a vacation or new wardrobe might be tempting, there are many savvy ways to use your tax refund that can significantly benefit you financially in the long run.
Let’s examine the Canadian tax refund. With the help of a Certified Financial Planner (CFP), we’ll also explore how to secure your refund, the typical timeframe for receiving it and some smart strategies for spending it to build long-term wealth and stability.
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Every year, your employer estimates tax deductions from your pay. You’ll see that withheld from your paycheques and on your T4 slip. It approximates what your tax plan is going to be and withholds that amount from your pay throughout the year. Because it doesn’t know the credits and deductions you’re entitled to (registered retirement savings plan [RRSP] contributions and student loan interest, for example), you may pay more tax than you need to. Then you’ll receive a tax refund the following tax season.
So, no, a tax refund is not “free” money. “It’s more that you’re giving the government an interest-free loan throughout the year, actually,” explains Ayana Forward, a fee-only certified financial planner and founder of Retirement in View.
Forward explains that you can request that your employer withhold less tax by filling out a T1213 form, but few do. It could be because most people look at their Canada Revenue Agency (CRA) tax refund as a form of forced savings. “You’re likely to be more careful with a lump sum in terms of a refund than an extra $50 per pay period that you could just be spending on coffees and not thinking about it. If you get this big chunk of money, you’re more likely to think about how you’re going to use it wisely,” she says.
You can expect your return within two weeks and eight weeks when you file a paper return, as long as you file on time, according to the government. Non-residents, though, can expect a longer wait time of 16 weeks. (Check out: “Earning, saving and spending money in Canada: A guide for new immigrants.”)
“In terms of speed, direct deposit is the fastest,” says Forward. “That way, you’re not waiting for a cheque to come in the mail.”
Know, though, that delays are possible. Tax refunds are subject to pre-assessments—the government requests receipts before assessing and processing refunds, says Forward.
But when you do receive your refund, here are…
How you choose to spend your tax refund will often boil down to your tax bracket and debt profile, Forward explains, and working with a certified financial planner (CFP) can help you cut through the noise and allocate it wisely. Here are 10 savvy ways to spend your tax refund.
“If you’re carrying credit card balances, you might want to go in that direction to get rid of any of those balances so that you’re not paying interest that you don’t need to pay,” says Forward. Eliminating or significantly reducing credit card debt with your tax refund can save you money in the long run and improve your overall financial health and creditworthiness.
Building an emergency fund with your tax refund can provide a financial safety net for unexpected expenses and prevent you from going into debt during emergencies. Consider a high-interest savings account (HISA) for your emergency fund to earn interest on your savings and interest on the interest, which is called compound interest. (Check out MoneySense’s compound interest calculator).
If home ownership is a future goal for you, setting up a first home savings account (FHSA) with your tax refund can kickstart your journey to becoming a homeowner. You’re limited to $8,000 a year and a maximum of $40,000, but it’s a solid first step to owning your first property that only first-timers can take advantage of.
If you haven’t created any financial goals yet but still want to be intentional with your tax refund, opening a tax-free savings account (TFSA) with your tax refund can help you grow your savings tax-free and provide flexibility for future financial goals.
Contributing to an RRSP with your tax refund can help you save for retirement and reduce your taxable income. Still, Forward explains that this option may be less important if you need the money sooner or already have a pension. “A younger person might not be thinking about RRSPs because they’ve just started their career,” says Forward. “RRSPs make more sense when you’re in your highest tax bracket, and you can get the most bang for your buck.”
If you have a mortgage with a prepayment privilege, you may use your CRA tax refund to make a prepayment on your mortgage. It goes directly toward your principal owing, so you can reduce the overall interest you pay and shorten your mortgage term. Most lenders limit how many times you can pre-pay each year, but maxing out allowable prepayments can save you a lot of interest in the long run.
If you’ve got any lingering student debt, using your tax refund to pay down student loans can help you reduce your debt burden and save on interest payments over time. For more tips, check out “Student Money: “How to pay for school and have a life—a guide for students and parents.”
If you want to enhance your skills, increase your earning potential and open new career opportunities, consider investing your tax refund in continued education and further self-development.
Giving all or a portion of your tax refund to a charity near and dear to you is another way to positively impact those in need and bring meaning to your financial decisions. (Want to see how far your donation dollar will go? Here are the best charities for impact.)
We bet you didn’t expect to see this on our list, but Forward says it’s not always about being fiscally responsible. “Don’t be afraid to treat yourself. Even though, as a financial planner, I’m always suggesting how to build wealth, it’s OK to treat yourself, too.” Fun and financial duty don’t have to be mutually exclusive. Check out MoneySense’s guide to affording a fun life—even on a low income.
The best way to maximize your tax refund is to understand all the available credits and deductions. “Many people might not agree, but we are a pretty tax-friendly country,” says Forward. For instance, she explains that deductions like RRSP contributions are beneficial, especially for those in higher income tax brackets. The FHSA also lowers your income. But also keep track of your donations, medical receipts and other relevant documents. “All those things count toward increasing your refund,” says Forward.
Of course, if you’ve already done your taxes, you will want to keep this in mind for this year. And check out the latest federal budget to know of any tax changes and any new deductions.
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