Are you expecting a tax refund and wondering what to do with it? You may be tempted to treat yourself, but there are things you can do to improve your financial situation—and save money!—instead. Whether you have debts to pay off or you’re thinking of investing for your future, here are some tips on how to make the most of your tax refund.

What is a tax refund?

At tax time each year, many of us hope to receive some sort of tax refund. It’s always nice to get money from the government, but you should remember that a tax refund is actually your own money that you overpaid initially. Why does this happen? Because your employer’s payroll department bases your tax deductions on your income, without taking into account your contributions to a registered savings plan or the credits and deductions you’re eligible for.

How are tax refunds calculated?

The calculation of your tax refund is based on your situation and the information you’ve provided:

  • Your total income: employment income, self-employment income (minus business expenses), retirement income, capital gains, investment income, and rental income (minus rental expenses)
  • Your contributions to a registered retirement savings plan (RRSP) and a tax-free first home savings account (FHSA)
  • The deductions you’re eligible to make from your net income
  • Refundable and non-refundable tax credits
  • Federal and provincial income tax deducted directly at source and, for self-employed workers, tax instalments paid during the year

Tools like this online calculator can help you get an idea of your potential tax refund. Just gather your tax slips and follow the instructions to get an estimate.

Tips for making the most of your tax refunds

Settle off your debts

What if your tax refund could be used to… pay off your debts? If you prioritize paying down high-interest products, such as credit cards, lines of credit, and personal loans, you’ll reduce the amount of interest you pay monthly. This will help you eliminate “bad” debts more quickly and start saving for your projects, not to mention take a weight off your shoulders by alleviating some financial stress. Paying off your debts will also improve your credit rating and help you get better interest rates for credit applications in the future.

Reduce your mortgage

Though your mortgage falls into the “good debt” category, you may still want to use some of your tax refund to reduce your mortgage loan. By paying down your mortgage faster, you’ll reduce the balance and pay less interest over the long term. In a context of high interest rates, this strategy makes a lot of sense. First, however, you need to make sure that this is an option under your mortgage agreement, or you could face penalties.

Invest for the long term

We can’t stress it enough: the earlier you invest, the faster your money will grow thanks to compound interest. If you have unused contribution room in your RRSP, FHSA, registered education savings plan (RESP), or tax-free savings account (TFSA), you may want to use your tax refund to get ahead or catch up on your investing.

Create an emergency fund

Unexpected car problems, job loss, household repairs . . . Life isn’t always smooth sailing, which is why it’s important to have an emergency fund. Ideally equal to three to six months of your net income, this safety cushion will give you peace of mind and ensure that you won’t have to rely on high-interest credit. Creating an emergency fund is easy: just open an account and start depositing a small amount into it on a regular basis. Without even realizing it, you’ll have a decent amount saved up within a few months. Your tax refund could be the perfect starting point for your emergency fund, or an easy way to add to it.

Avoid impulse spending

Are you the type of person who can’t wait to get your tax refund so you can finally buy that product you’ve been eyeing for months? Do you tend to spend impulsively until you’re out of money? If so, you’re definitely not alone—but you’d be wise to change your financial habits. Consider paying off your mortgage and other debts instead of succumbing to instant gratification. That way, you’ll be able to enjoy the money you saved on interest fees later on, without the guilt. Think about it: is the enjoyment you’ll get from buying another shiny new gadget worth the financial stress you’ll face if the unexpected happens? Setting up a budget gives you a clearer picture of your finances and makes it easier to resist impulse purchases.

How to use your tax refund: Strategies for optimizing your finances - Blog | Multi-Prêts Mortgages

How to maximize next year’s tax refund

Invest in an RRSP

Whatever your age, maximizing your RRSP helps you save for retirement and grants you a deduction you can claim on your next tax return. Be careful not to exceed your contribution room, however, as this could result in penalties and higher taxes.

Are you a parent with unused contribution room in your child’s registered education savings plan (RESP)? Investing in an RESP can lead to generous government benefits of up to $7,200 per child.

If you’re thinking of buying a home, the tax-free FHSA could be a major help. Contributions are tax-deductible, and your investment income and capital gains will grow tax-free, just like with the TFSA.

Since TFSA contributions aren’t tax-deductible, they can be withdrawn at any time without being taxed. The withdrawn amounts are also added back to your contribution room for the following year.

Take advantage of available tax deductions

Other deductions that can help you reduce your taxable income include:

  • Capital gains deduction
  • Moving expenses
  • Child care expenses
  • Carrying charges and interest expenses

Check the list of federal deductions and provincial deductions (Quebec) so you can optimize your taxes.

Maximize your tax credits

Unlike tax deductions, tax credits don’t reduce your taxable income. There are two types of tax credits.

Non-refundable tax credits reduce your tax payable:

Refundable tax credits can increase the amount of your tax refund:

  • Canada Workers Benefit
  • Tax Credit for Children’s Activities
  • Tax Credit for Childcare Expenses
  • Solidarity Tax Credit

To learn more about these tax credits and which ones apply to you and you can claim, visit the websites of the Canada Revenue Agency (CRA) and Revenu Québec.

Key takeaways

  • Various factors are used to calculate the amount of your tax refund.
  • By prioritizing repayment of your high-interest debts, you’ll save on the amount of interest you pay each month.
  • If you have unused RRSP, FHSA, RESP, or TFSA contribution room, your tax refund could help you get ahead or catch up on your investing.
  • Unlike tax deductions, tax credits do not reduce your taxable income.
  • Non-refundable tax credits reduce the amount of tax you owe, while refundable tax credits can increase the size of your refund.

FAQ | How to use your tax refund

Taxpayers who file their tax return online usually receive their tax refund within two weeks. For returns filed by mail, it can take six to eight weeks. If you sign up for direct deposit, refunds will be deposited into your account faster.
Certain situations can delay the payment of your tax refund—for example, if your return needs to be reviewed, if you filed after the deadline, if you have an outstanding balance with the CRA or Revenu Québec, or if your personal information is inaccurate.