What could be better than getting a tax refund?
The answer is - not getting one. You see, a tax refund cheque is not a gift from the Canada Revenue Agency (CRA). It’s money you overpaid during the year that you are now getting back – but without interest.
You could spend it – it is yours after all. Or you could explore some other options including making that money grow and not getting a refund next year. Here’s how:
Make your 2009 RRSP contribution right now. You get the benefit of almost an extra year of potential long-term RRSP tax-deferred growth, plus a tax deduction against your taxes next year.
Contribute to a TFSA. Starting in 2009, you are able to save up to $5,000 a year in a Tax-Free Savings Account, or TFSA. While the contributions are not tax-deductible, you will not be taxed on any of the investment income generated by the TFSA. As well, the tax-free withdrawals can be re-contributed to the TFSA in a future year.
Increase your non-registered investments. If your RRSP and TFSA are topped up, add to your non-registered investments. Plan to hold stocks and equity mutual funds outside an RRSP or TFSA because any gains on these investments are taxed at the more favourable capital gains inclusion rate. As well, Canadian dividends received from these types of investments qualify for the dividend tax credit.
Get a grip on education costs. Establish a Registered Education Savings Plan (RESP) to fund your children’s future education costs. RESP contributions are not tax deductible, but their growth is tax deferred and they qualify for Canada Education Savings Grants* of up to 20 per cent of your contribution.
Pay down your most costly debt. The interest on credit card debt often ranges from 15 to 29 per cent so you should reduce or eliminate that debt first.
Pay down your long-term debt. Once you’ve taken care of your high-cost debt, pay down non-deductible debt such as your mortgage. A pre-payment will chop months or years off your repayment schedule and could save you hundreds or thousands of dollars in interest payments.
Park your refund for a rainy day. If your refund is large, park some cash in a short-term investment where you can access it without penalty. You’ll have a ready source of cash for a new car or emergency home repairs without having to borrow or use your credit card to meet unexpected expenses.(Some individuals may use the TFSA for their emergency fund).
Eliminate next year’s refund by having less tax withheld from your paycheque. You’ll have a little more money for your own use every pay period. To lower your withholding tax, use File Form T1213, available from your local CRA office or from the CRA Website, www.cra-arc.gc.ca.
With the right tax strategy, you won’t necessarily get a refund cheque but you will get the most out of what you earn and invest. Talk to your professional financial advisor to find out what works for you.
John Scholl B. Mathematics, CGA,
Wealth Management & Financial Planning
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