The federal government predicts that the average tax refund will be almost $1,500 this year.
What you do with your riches apparently depends on your gender and where you live.
According to a study conducted for Scotiabank, a typical Canadian uses one-third of the refund to pay down debt while another third will go into either savings or investments.
However, those wild and fun-loving Quebecers are more likely than other Canadians to blow at least a portion of their refund on a vacation or other stuff. Who can blame them?
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Western Canadians from the Prairies to British Columbia are more likely to add to their savings accounts than to their investment portfolios.
Ontario taxpayers take a more balanced approach by allocating relatively equal amounts to savings and investments. The study also showed that women are significantly more likely to save than invest in securities.
What is the best way to use your refund?
A popular strategy suggests that you might want to consider plowing your refund back into your Registered Retirement Savings Plan.
If you earn in the top tax bracket and are taxed at source, you could have generated a tax refund of a little more than $9,000 by investing $20,000 in your RRSP last year. That goes a long way toward topping up your contribution for this year.
Investing in a Registered Education Savings Plan or Registered Disability Savings Plan for an eligible child can attract additional government contributions in the form of grants.
Another option is to place up to $5,000 of your refund in a Tax Free Savings Account. This will allow your funds to grow without further taxation and gives you the ability to withdraw them at anytime while maintaining your contribution room.
Anyone who has a mortgage on their house and sees in their year-end statement how much more goes toward the interest portion rather than the principal might be well served by making an extra mortgage payment or two if their mortgage agreement permits.
Such a payment goes immediately to paying down principal without interest attached.
If you hold significant consumer or credit card debt, which carries high interest rates, paying down the debt should likely be your priority.
Many cards carry eight to 19 percent interest and if you have financed furnishings interest free for one to two years, you will find that any residual amount owing beyond the time limit for full payment will carry interest well over 20 percent.
Paying down this amount gives you a similar return on your investment. In today’s marketplace, that is a significant rate of return on your money.
Larry Roche is a tax analyst with Farm Business Consultants Inc. Contact: fbc@fbc.ca or 800-860-7011.
