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Tax season is here and if the taxes withheld from your paycheck by your employer was higher than required, you can expect a tax refund. The average tax refund for Canadians in 2015 was approximately $1,700.

Other scenarios where you can expect to receive a tax refund include:

You Made RRSP Contributions: Contributions made to your Registered Retirement Savings Plan (RRSP) will lower your taxable income and generate a refund proportional to your marginal tax rate.

First-Time Home Buyer: If you became a first-time home buyer in 2016, you can expect to get the first-time home buyers’ tax credit up to a maximum amount of $750. You can claim the tax credit on your personal income tax return under line 369 of Schedule 1 of your Federal Tax form.

You Donated to Charity: When you donated to a charitable cause in 2016, you were probably issued a gift aid receipt. When you account for this in your tax return, Canada Revenue Agency will refund 15% on your first $200 eligible donation and 29% on any balance exceeding $200. First time donors may qualify for an additional 25% in tax credits.

Children’s Fitness Amount: If you paid registration or membership fees for your kids to participate in eligible programs involving physical activities, you may be eligible for a refund up to $75. Additional credits are available for kids with disabilities. The Federal fitness amount tax credit will be eliminated starting in the 2017 tax year (2018). There are also some provincial fitness tax credits available for kids and young adults.

A Tax Refund is Not Free Money

While a tax refund from the government is always a welcome thing, it should not be considered as free money. It is not! In fact, it may mean that you have allowed the government to use your money interest-free for several months. This is funds that could have been earning interest for you in a savings or investment account.

Refunds should be considered as earned income and should be handled with the same scrutiny you have in place for all your other financial affairs. If you want to decrease the amount of “interest-free loan” you are providing to the government, you can update your  Form TD1 “Personal Tax Credits Return” and also complete Form T1213 “Request to Reduce Tax Deductions at Source” .

Some of the savvy things you can do with your tax refund include:

1.Pay Down or Pay Off Debt

Pay Off Debt using your tax refund

High-interest debt such as credit card debt can add up fast  and become difficult to get rid off. If you have credit card debt, consider using your refund to pay it down. With interest rates on credit cards up to 20% or more, paying it off is like earning 20% or more on an investment. If you do not have credit card debt, consider lowering your other debt obligations like student loans, car loans, lines of credit, etc.

Related: How Your Canadian Credit Score is Calculated

2. Build Up Your Nest Egg

 

Build Up Your Nest Egg using your tax refund

If you do not have high-interest debt that needs to be paid off, consider building up your retirement savings. Every year you have earned income, you are eligible to contribute to your RRSP account (up to the greater of 18% of your earned income or $26,010 for 2017).

RRSP contributions made after March 1 will generate a tax refund for the next tax year. You can also consider contributing to a spousal RRSP particularly if this lowers your combined income taxes via income-splitting in retirement.

Related: Understanding the Canada Pension Plan

3. Build An Emergency Fund

Build An Emergency Fund

Having emergency funds that you can fall back on when in a pinch can save you from drowning in debt if emergencies arise. Emergency funds should be easily accessible and can be put in a high-interest savings account. Consider using your tax refund to start an emergency fund or to rebuild one that has been depleted.

Related: 15 Important Financial Terms You Should Know

4. Put Money Aside For Your Kids Education

Save for College

If you have kids, it is a good idea to utilize the Registered Education Savings Plan (RESP) account. You can save your kids from the heavy burden of student loans if they choose to pursue tertiary education. You will also be taking advantage of a guaranteed 20% or more investment return in additional government grants on contributions up to $2,500 per year, i.e. for every $1 you contribute, you get 20 cents or more in grant money. Over the life of the RESP, you can get up to $7,200 per kid in free government contributions. Not bad, eh?!

If your kids decide not to pursue further education, you will get your funds back plus any income earned.

Related: Understanding the RESP

5. Use up TFSA Room

Use up TFSA Room

Build up your investment portfolio by contributing to your Tax Free Savings Account (TFSA). The TFSA allows you to invest or save using after-tax income and investment income earned is tax-free. Total TFSA contribution room since inception is now $52,000 (2017). Depending on where you invest your TFSA, it can also serve as your emergency funds.

Related: TFSA Contribution Limit for 2017

6. Save for Home Down Payment

Save for home down payment

If you are planning to buy a house in the near future, consider putting your refunds towards your down payment. A higher down payment can save you thousands of dollars in interest over the life of the mortgage. Additionally, If you have a down payment that is 20% or more of the value of the house, you are not required to obtain mortgage default insurance, and will save thousands of dollars.

Related: How Much Can I Afford To Spend On a Home

7. Make a Charitable Donation

Give to Charity

If you do not have a regular schedule for giving to charity, consider donating some or all of your tax refund to charitable causes you believe in. You will be doing the world some good and as a side benefit, your donation will also generate further tax refunds next year.

Related: 10 Ways To Save Money This Christmas

8. Pay Down Mortgage

Pay Down Mortgage

A mortgage can literally take decades to pay off. Making additional one-off payments annually can significantly decrease the amortization period by several years and save you thousands of dollars in interest payments. For example, assuming a 25-year $400,000 3% interest mortgage loan, if you pay an extra $5,000 annually, it will reduce the amortization period by about 6 years and save approximately $46,000 in interest.

Related: Mortgage Broker vs. Big Bank

9. Invest in Yourself

Invest in Yourself

If you have ever considered that additional training or education could advance your career or earning ability, it may be time to step up to the plate. Like Benjamin Franklin said, “An investment in knowledge pays the best interest.” Consider using your tax refund to pay for that education, attend that training or workshop, pay for that tool, buy those books…

Related: Home Buyer’s and Lifelong Learning Plans

10. Fulfill Your New Year’s Resolutions

Fulfill your new year resolutions

If you are like the average Canadian, then you probably had some resolutions for the New Year. Whatever those resolutions are –  a more healthy lifestyle, reading more books, paying down debt, traveling, making home improvements, family vacation, and so on, your tax refund can help you fulfill some worthy resolutions for the New Year.

Related: 10 Worthy Financial Resolutions for the New Year