So you are receiving a tax refund this year.
Once the excitement wears off, I'd suggest you:
Use 40 per cent of the money to pay down any debt.
Invest 40 per cent - perhaps in this year's RRSP.
Spend and enjoy the rest.
Try not to get a refund again next year.
Dealing with the last point first, while it feels good emotionally to get a refund it shouldn't feel good financially. Receiving a refund means you gave Ottawa an interest-free loan for a period ranging from a few months to more than a year. Why? Possibly because you put yourself down at work to have more tax withheld than necessary, as a form of forced saving. (A better approach: Have that extra money transferred every payday into a Canada Savings Bond, or out of your chequing account into an RRSP or other savings/
investment vehicle.)More likely, you had deductions and credits for 2013 which reduced your tax bill below either the tax withheld at work or your tax instalments.
These deductions typically include an RRSP contribution, child care expenses, support payments, rental losses, business losses, interest expense on investment loans, other investment expenses, charitable donations and political donations, and employment expenses.
Whenever you know you will be claiming such expenses and that will create or increase a tax refund, you may ask to have less tax withheld at source by completing Form T1213 (13); go to cra-arc.gc.ca/E/pbg/tf/t1213/t1213-13e.pdf. Or if you aren't employed and pay tax instalments, you may reduce the amount.As far as the current refund, unless you specifically direct the money to destinations like the ones suggested earlier, your refund will soon disappear into general spending. Too often people fail to get the most value for their money - to make their money work as hard for them as they worked for it. And this is your money.The same approach applies to a windfall, like a lottery or other win, or an inheritance.
Mike Grenby is a columnist and independent personal financial advisor. Email [email protected]
