Finance: What To Do With Your Tax Return?

By this time many of you have done your tax return for 2016.If you made significant contributions to your Registered Retirement Savings Plan (RRSP) you may be looking at a large sum of money being returned from the Canada Revenue Agency (CRA).The CRA says the average return for the 2016 tax year is $1,650. It can feel like a big win when you see that money deposited. The tendency is to want to spend it on something fun and entertaining. But here’s the reality check. That money is income tax you over paid to the government and should be treated differently than if, for example, you won the lottery. Here’s what you should be doing with it.Reinvest it If you’re getting a refund because you made large contributions into your RRSP, you should take that return and deposit it right back into your retirement savings. That will kick-start your contribution for the 2017 year and result in a healthy return for next year that you can do the same with. This can be the hardest point to convince Canadians on, but it is the best move for your tax refund money. Once in your RRSP you can decide how you want to invest it by talking to a financial advisor or doing the research on your own.Pay down debt If you have a significant amount of debt, especially expensive credit card debt, it would be a good idea to use your tax refund to get those balances paid off. This will immediately save you money that you would have paid in interest payments and improve your credit score, as you will be carrying less liability. If you have no credit card debt but are carrying a balance on your line of credit, pay that down with your refund money. Then make a plan to use the money you would have spent to make debt payments to be deposited into a long term savings account, or even better, your RRSP.Make a lump sum mortgage payment Canadians are carrying a record amount of mortgage debt. This is largely due to real estate prices seeing double digit growth in the last few years across most parts of Canada. If you’re carrying a significant mortgage balance, use part of your return to make a onetime lump sum payment. This will automatically lower your mortgage loan, and result in more of your payments going towards paying down principal and less towards interest. It will also knock years off the life of your mortgage. Use a simple mortgage calculator to see how a lump sum payment will affect your financial situation right away.What not to do with your tax return The idea of spending your refund on a fancy vacation, some new clothes or a home renovation is appealing. But none of these expenses are appropriate to spend your tax return money on. The better move is to take your return and do something financially responsible, like pay down debt and invest. The immediate benefit you get from doing that will result in more money in your pocket. For example, being debt free keeps money in your bank account that you would have used to service that loan. That extra money is what you can use on the fun stuff — the trips, the clothes, the dinners out with friends. Once you have your financial health in check it’s easier to make decisions about your money that are much more interesting than making an RRSP contribution or paying down debt. It’s not a lottery win; it’s your hard earned money being returned. So treat it with that respect.RUBINA AHMED-HAQ is the Finance Editor for HPG. She regularly appears on CBC, CTV and Global Toronto. She writes for RateSupermarket.ca, Debt.ca and AlwaysSaveMoney.ca. She's a graduate of the Humber College journalism program and holds the CSC designation. Follow her @alwayssavemoney. 416.669.2245