Spending and saving in helpful harmony
Other than those who work in the tax business, no-one looks forward to preparing an income tax return –that is, unless you’re expecting a refund!
If you’re keen and prepared, the Canada Revenue Agency (CRA) allows for online filing of your 2023 personal income tax return as early as Monday, February 19, 2024. Otherwise, the deadline to file without facing a late penalty is midnight on Tuesday, April 30, 2024.
Whatever date you can get yours in, it’s a good idea to register for your CRA “My Account” and sign up for direct deposit. According to the agency’s website, you can receive your refund in as little as eight business days.
Back to the refund itself, you may have visions of champagne and caviar dancing in your head, but here are some tax-motivated suggestions to complement those thoughts, before it’s all spent.
1. Your RRSP
As a first priority, consider contributing a portion into your registered retirement savings plan (RRSP). It can get your savings routine going early in the year, helping to generate another refund next year. Available contribution room includes carryover of previously unused room plus 18% of the preceding year’s earned income, up to the annually-indexed maximum prescribed by regulation. For 2024, that prescribed maximum is $31,560, reached at 2023 earned income of $175,333.
Even so, it’s important to understand that the reason many people get a refund is because their employer was not aware of RRSP contributions made outside the workplace. Too much tax may have been withheld on payroll than required, so really you’re getting back the money you loaned interest-free to the government over the year.
So, rather than waiting another 12 months before you get that next refund, you may wish to file CRA Form T-1213 with your employer to reduce the withholding tax on your payroll deposits. You’ll increase your current cash flow, rather than waiting to get it in a lump sum next year.
2. Spousal RRSP
You can use your contribution room for your own RRSP or to put it toward a spousal RRSP. This sets the stage for income splitting between the two of you, as you get a deduction at your tax bracket now, and your spouse withdraws at an expected lower bracket later.
Understanding that the primary purpose is to assist with retirement income, that withdrawal does not have to wait until any particular age. Even so, don’t be too hasty: Withdrawals taken in the contribution year or in the two calendar years afterward will be taxed to the contributor spouse.
3. RRSP loan paydown
An RRSP loan can give a boost to your RRSP if you don’t have money available as you near the contribution deadline at the 60thday of the year following the calendar year for which you intend to claim the deduction. Bear in mind though that interest on such loans is not tax-deductible, and neither is the repayment of the loan principal.
It’s a good idea to use the refund generated from the contribution to pay down the bulk of the loan initially, and pay off the rest over the coming months. Once the loan is paid off, you could continue that cash flow routine, but now contributing directly into your RRSP to get ahead on this year’s contributions – and next year’s refund.
4. FHSA for first-home financing *new*
Available as of 2023, qualified individuals who do not currently own the property where they live may be eligible to contribute up to $8,000 annually (up to $40,000 lifetime) to a first home savings account (FHSA) to help with the down payment on a home. FHSA contributions are tax-deductible, accumulation is tax-sheltered, and withdrawals are tax-free when applied toward a first home purchase.
5. Mortgage reduction
A home purchase is likely the largest single financial event of your life, usually accompanied by a mortgage that will take years or decades to pay off. An annual top-up from your tax refund is a simple and effective strategy to get you mortgage-free sooner. Those extra payments can reduce both the time to retire that loan and the interest you pay, giving you more flexibility and control of your finances along the way. And remember, both the interest and principal repayment are in after-tax dollars, which is another way of saying they are non-deductible – and that brings us to …
6. Paying down discretionary non-deductible debt
There can be many points in life when available resources aren’t sufficient for current needs. That’s when the prudent use of credit can help you bridge the time until you have surplus money to work with. Still, you have to keep an eye on your debt, as it can easily compound against you faster than you can build savings if you’re not careful.
It helps to have a plan and commitment to eliminate debt as soon as manageable, to keep your finances on track.
7. TFSA for flexible savings
The tax-free savings account (TFSA) was introduced 2009, complementing the RRSP program that has been around for more than half a century. TFSAs allow after-tax investment dollars to grow tax-sheltered and to be withdrawn tax-free. Each Canadian resident over age 18 is entitled to $7,000 of TFSA annual room in 2024, and for someone who was over 18 when it began in 2009 (but hasn’t used it), the carryforward room is $95,000.
8. Life insurance for tax-smart family protection
Parents generally appreciate the value of life insurance, but may stall in putting it in place, being unsure where they’ll find the cash for the initial premium. A tax refund can be an ideal starter for systematically saving for and servicing that insurance, without disrupting the household budget. Once over that first hurdle, it becomes increasingly easier to sustain the routine. And if payment does come about, the insurance proceeds are tax-free.
9. RESP for education
Post-secondary education costs continue to rise at staggering rates. That’s why it’s so important to save early and save smartly for a child’s education – which is where the registered education savings plan (RESP) comes in. Your tax refund can start or sustain an RESP. Coupled with generous government matching grants of up to $1,000 a year, all invested dollars grow tax-sheltered, with the earnings taxed to the student when eventually withdrawn for education needs.
10. RDSP for disability needs
Significant government support and tax benefits are available through the registered disability savings plan (RDSP) for families with disability needs. Government matching grants can be as much as 300% of personal contributions, making this a prime place to consider for tax refund money. Depending on household income, up to $3,500 in grants may be received in a year. Be sure, however, to coordinate the RDSP within an overarching life program, of which financial management is of course a key component.
11. Non-registered investments
Though we tend to think first of saving in the tax-sheltered plans mentioned earlier, there is a legal limit on how much can go into each of them. Once those options have been exhausted, you can use non-registered accounts that don’t have such limits. And depending on your age and stage in life, it can make sense to complement or supplement current savings with non-registered investments even sooner.
12. Live it up … a bit
After all, saving is just spending-in-waiting – but try to keep it in balance.