Saving is the way to pay yourself back, over and over
At the risk of taking the fun out of tax season – stop laughing, keep reading – I suggest that you devote your tax refund toward savings. Okay, spend some, but allow me to make my case for making saving your first priority.
A tax refund is a kind of forced savings already. In essence, the taxes that were withheld over the course of last year were more than necessary to fulfill your annual income tax obligation. Once the full calculation has hit the books with the filing of your tax return, the government sends back that overage.
Commonly for those whose income is mainly employment-related, the refund arises due to RRSP contributions. Your employer would have reduced its withholding where it knew about contributions to workplace pensions and RRSPs, but it would not have known to do that for RRSP contributions you made outside of work. For example, at a 40% tax bracket, a $1,000 contribution to your own RRSP reduces your reportable income by that amount, so you have $400 coming to you.
As well, you likely made RRSP contributions in January and February, and are allowed to apply those contributions against last year’s income. Assuming so, that gets you your tax break as early as possible, but let’s pause and think about the mechanics involved in that.
For those workplace RRSPs, you are using some of your 2018 income to reduce 2017 income, in effect paying last year’s taxes with this year’s income. That can put growing pressure on your cash flow from year to year, and put you in an especially difficult bind if you lose your job.
At a minimum, save the refund related to those first 60 days, whether it’s simply set aside in a tax-free savings account or it goes as a further RRSP contribution. If it is the latter, your larger refund next year can help reverse you out of catch-up mode with your taxes. Supplement that with the refund from your other RRSP deposits and you’ll be ahead on both your taxes and your savings.