‘Ask a lot of questions’ before deciding what to do with your tax refund: experts

When Julian Shenoy receives his tax refund this year, he plans to set aside some of it for investments and the rest for travel.

“With the pandemic and such, everything was closed over the last three years, so most likely (I’ll put) more of a proportion of it toward leisure — maybe 50 per cent of it toward investing and 50 per cent toward a holiday,” Shenoy said in a phone interview.

The millennial based in Toronto said he’s “pretty lucky” not to have accumulated as much debt as many others have in his age group, which is why he plans to spend his tax refund this way.

“It’s a little different for me to have more disposable income, but I think if you have more expenses, it might be difficult,” Shenoy added.

With tax season upon us, experts say it’s best to take a hard look at your finances before deciding what to do with your tax refund — and they emphasize there is no one-size-fits-all approach for everyone to take.

“There isn’t a cookie-cutter solution. Everybody’s different,” said Brenda Hiscock, a fee-only, advice-only certified financial planner at Objective Financial Partners in Toronto.

Top of the list of things you should consider, Hiscock said, is whether you have debt that you need to pay down.

“If you have high-interest debt, that’s the first thing that you would want to do with your tax refund, because that debt is really going to accumulate very quickly and is very costly,” she said.

Next, Hiscock recommends looking into employer matching programs for retirement savings, in which an employer matches an employee’s contribution into a registered retirement savings plan (RRSP). It’s often dollar-per-dollar up to a certain amount or up to a given percentage of an employee’s salary.

“Employer matching programs are free money and many people miss out on the opportunities that they present and so I would (at the) next stop look and see if you’re maximizing any matching programs,” she said.

Finally, Hiscock said you should consider directing your money toward an RRSP, a tax-free savings account (TFSA), or first home savings account (FHSA), which is a new type of registered account that allows you to save for your first home tax-free up to certain limits and became available just this month (not all financial institutions have rolled out their offerings yet, so be sure to ask around).

If you make $50,000 or less a year and you have a limited ability to invest, she recommends setting aside money in a TFSA.

If you make more than $50,000, then you should consider putting money in an RRSP or FHSA, depending on whether you meet the definition of a first-time homebuyer set by the federal government and “which one will be most beneficial for your situation,” said Hiscock.

The key to long-term success with investing is diversification and consistency, she added.

“You really want to look at a well-diversified portfolio, because I do find that many people end up buying what their friends tell them to, or one stock, or some speculative investments,” said Hiscock.

Though it may be exciting to receive a tax refund, Hiscock cautions against impulse spending and instead suggests perhaps setting aside a small percentage of it toward personal pleasure and the rest toward more responsible financial planning like paying off debt or investing.

“There’s being practical, of course, but there’s also making ourselves happy and enjoying life, and I think that we need to find a good balance there,” she said.

Natasha Jahrig, account manager, personal banking at Canadian Western Bank, offered similar advice for Canadians who are debating what to do with their tax refund.

“It’s definitely not a one-size-fits-all kind of advice. It really is based on personal situations,” she said. “I would ask a lot of questions like, `What is most important to you?”‘

People with debt — especially high-interest debt — should pay it off early to ensure that they can take back control of their finances, said Jahrig.

Those who don’t have a lot of debt should consider creating an emergency fund with their tax refund in the event that they lose their job or have another emergency that could put a dent in their wallet, or putting money in TFSAs, RRSPs, or non-registered investments, she said.

Non-registered accounts are taxable investment accounts offered by banks and financial service providers in Canada. They allow you to invest an unlimited amount of money in an array of investments and are useful if you have maxed out your TFSA or RRSP.

If you’re uncertain of what to do with your tax refund or would like to receive personalized advice from an expert, Hiscock and Jahrig said you should speak to a certified financial planner, a trusted financial adviser, or perhaps even an accountant who may be doing your taxes.

“It is so important to have that relationship with your experts so that they can provide you with what’s going to be best for you specifically,” said Jahrig.

You can also turn to free online resources like getsmarteraboutmoney.ca, which Hiscock said has “excellent coverage” of all areas of financial planning.

Overall, the experts underscored that it’s worthwhile to carefully consider your options when you receive your tax refund.

“If you really think it through and are strategic, then you’ll likely come out ahead in the long term,” said Hiscock.

This report by The Canadian Press was first published April 11, 2023.