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Dale Jackson

Personal Finance Columnist, Payback Time


If you beat the April 30 income tax filing deadline, congratulations. Now the fun part.

According to the Canada Revenue Agency (CRA), an estimated two-thirds of taxpayers are eligible for a refund this spring; averaging $2,200 each.

Refund amounts are much higher for those who lowered their 2023 taxable income by taking advantage of all available credits and deductions, or by making hefty contributions to their registered retirement savings plans (RRSP) and other registered investment plans.

While tax refunds are considered fun money for most of us, there are 3 ways to invest that cash that can compound and reap rewards over time.

Invest in your debt

Compounding works both ways. With Canadian's household debt at record levels, it works very well for lenders.

As borrowing rates sit at 30-year highs, every dollar invested in lowering household debt is a risk-free, tax-free, way to generate a return equal to the rate you are paying.

In other words, paying down the balance on a credit card that charges 18 per cent is similar to generating an 18 per cent return. 

No guaranteed investment pays off like that. The only comparable investments are guaranteed investment certificates (GICs), which currently pay out about 5 per cent annually. 

The same principle applies to consumer loans and student debt, which have now reached the lower teens. 

Only secured debt tied to assets, such as mortgages, have managed to remain below 7.5 per cent.  

Re-invested refunds compound RRSP savings

RRSPs are great for tax-free investment growth over long periods of time, but the biggest tax advantage only comes if the refund is re-invested.

If you are one of the many Canadians who scramble every February to make your RRSP contribution before the deadline, consider getting a jump on this year’s tax savings by re-contributing your refund.

In addition to taking some of the pressure off, re-investing your refund will generate another refund next year, and that re-invested refund will generate another refund - and so on.

Re-investing refunds can super-charge RRSP savings over the years but it’s important to keep in mind that all those contributions and all the returns they generate will eventually be taxed when they are withdrawn.

The trick is to make RRSP contributions when you are paying tax at a high marginal rate and withdraw when you are at a low marginal rate - ideally, in retirement.

If RRSP savings grow too much you will eventually be forced to make minimal withdrawals at a higher rate, and benefits such as Old Age Security (OAS) could be clawed back.

Divert your refund to a TFSA

If you are concerned your RRSP is growing too much or if you currently pay tax at a low marginal rate (because your income is low), consider re-investing your RRSP refund in a tax-free savings account (TFSA).

Unlike an RRSP, TFSA contributions can not be deducted from taxable income. On the bright side, TFSA withdrawals are never taxed. Like an RRSP, they can hold just about any investment.

Ideally, the right mix of savings in an RRSP and TFSA will allow you to withdraw from your RRSP at the lowest marginal rate in retirement and top off any further living expenses from your TFSA.   

Ottawa has permitted another $7,000 in TFSA contribution space for 2024. Total allowable amounts vary depending on individual circumstances.

To get an idea of how significant the TFSA has become, the total allowable amount since it was introduced in 2009 is now $95,000.

The Federal government is expected to continue adding TFSA contribution space in future years, which means it could become a permanent home for your RRSP refunds.