What to do with your Tax Refund?

It’s great to get a tax refund, isn’t it? So, what are you going to do with it? In past years, you might have been sorely tempted to spend it on a guilty pleasure but maybe not in this more economically ‘iffy’ year.

However – ‘if’ you want to improve your personal economy in the longer run, here are a few options for making the best use of your tax refund.

Accelerate your RRSP. Get a head start on your next year’s Registered Retirement Savings Plan (RRSP) contribution. You’ll benefit from almost an extra year of potential long-term RRSP

tax-deferred growth, plus a tax deduction against your taxes next year.

Check out new investment opportunities: If your RRSP is topped up, use your refund to:

• Open a Tax-Free Savings Account – you’ll enjoy tax-free earnings and growth and you can make tax-free withdrawals at any time for any use you can imagine.

• Add to your non-registered investments. The best tax-reducing strategy is to hold stocks and equity mutual funds outside an RRSP. Any gains on these investments are taxed at

the more favourable capital gains inclusion rate and Canadian dividends received from these types of investments qualify for the dividend tax credit.

Build an education fund. Fund your children’s future education costs with a Registered Education Savings Plan (RESP). RESP contributions are not tax deductible, but their growth is tax deferred and they qualify for Canada Education Savings Grants* of 20 per cent or more of your contribution.

Pay down your most costly debt. The interest rate on credit card debt can range from 15 to 29 per cent per annum – so be sure to reduce or eliminate that debt first.

Pay down your long-term debt. Taken care of your high-cost debt? Then pay down nondeductible debt like your mortgage. Every pre-payment will reduce your repayment schedule

and could save plenty in interest payments.

Zero next year’s refund. Why give the government an interest-free loan of your money for a year and have to wait for a refund cheque? Apply to have less tax withheld from your pay cheque and you’ll have a little more money for your own use every pay period. Apply to lower your withholding tax using File Form T1213, available from your local CRA office or from the CRA Website, www.cra-arc.gc.ca.

It’s great to get a tax refund – but it’s even better to have a comprehensive tax and financial plan. A professional financial advisor can help develop the right plan for you.

* Canada Education Savings Grant and Canada Learning Bond are sponsored by Human Resources and Skills

Development Canada.

John Scholl   B. Mathematics, CGA, 

Wealth Management & Financial Planning

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Living in a plastic world; Tips for managing your debt

In the early 20th century, Canadians had very little personal or consumer debt. Individuals mainly used cash to purchase products and services while universal credit cards didn’t even exist until the 1950s. In the early 1900s, banks would seldom lend money to middle and working class people so they rented their homes or paid for them as they were being built. This meant no mortgages, no lines of credit, no car loans, and no credit cards.

Most of us probably can’t imagine a life where we save up for years before making major purchases. In fact, according to the Canadian Bankers Association, there were 64.1 million Visa and MasterCard cards in circulation in Canada in November 2008. It’s safe to say that debt plays a large part in the lives of most young people these days – but that’s not necessarily a bad thing.

Good debt vs. bad debt

Debt is often made to sound like a bad word but in reality, low-interest loans that allow you to obtain a higher education or a place for your family to live can be a good thing. They make large purchases affordable to the average consumer. The problem lies in carrying high-interest-rate, non-deductible debt such as credit cards.

But what should you do if you find yourself drowning in debt?

First, let’s talk about what you shouldn’t do. You shouldn’t pay off your highinterest debt by using some of your Registered Retirement Savings Plan (RRSP) money. When you remove cash from your RRSP to pay a debt you’ll have to pay income tax on the money you withdraw, and you’ll forfeit the years of tax-deferred growth that would have contributed to your retirement lifestyle.

That being said, you must find extra money somewhere and here are a few tips to help you do so.

Consider a debt consolidation loan

Ask about combining or “consolidating” your debts into one loan that is used to pay off all your debts. In return, you make monthly payments on the loan at a lower interest rate. Then, you can use the extra money you have left over every month to pay down your debt even faster. Of course, while you are reducing your overall monthly payments, be aware that you may also be extending the length of time over which you are carrying the debt.

Budget, budget, budget

Take a critical look at your income and expenses. Do you know where your money goes every month? Small changes in your spending habits can yield big returns – and every extra cent you save can be used to pay down your debt. Remember to plan a budget reasonably. If your goals are too lofty, chances are you won’t stick to them at all.

Pay close attention at tax time

Another way to free up cash flow is to take advantage of every possible tax deduction and tax credit that may apply to you – including items like moving expenses, child-care expenses, tuition fees, medical expenses and charitable donations.

It’s true that the average household debt has increased during the last few decades; however, this doesn’t have to mean financial crisis for your family. By taking a serious look at your debt and finding small ways to reduce it, you can improve your financial situation and still save for your future. For more ideas on how to trim your debt, give us a call.

JOHN SCHOLL, B. Math, CGA, EPC   John's Home Page