How to Make the Most of Your Tax Refund

Last Updated: March 2024

If you’re expecting to receive a tax refund this spring, you’ve got some decisions ahead of you. While nobody would blame you for using some (or all) of your tax refund to splurge on something special, here are a few other options to consider that may instead help you get closer to your financial goals, whatever they may be.

Pay down debt

With inflation and interest rates where they are, it might be a good time to consider reducing amounts owing on your debts — think mortgage, HELOC or personal line of credit. That way, you could curtail your debt carrying costs before those higher payments start to eat into your available investment dollars. Paying off any high-interest debt, such as outstanding credit card balances, could also save you in interest charges, which could in turn open up more money in your budget.

Start or rebuild an emergency fund

The pandemic has shown us how important it is to plan for the unexpected — and how volatile markets can be. Saving a few months' worth of expenses in an emergency fund can prevent the need to liquidate investments at a moment's notice when calamity strikes — which isn't ideal if markets are down and you're forced to sell at a loss.

Invest in a registered account

If you haven't already maxed out your available contribution room, you might consider investing your tax refund in a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), a First Home Savings Account (FHSA) or Registered Education Savings Plan (RESP), which each offer certain tax advantages. With a TFSA, for example, you pay no taxes on investment income and capital gains earned on qualified investments. In the case of an RRSP contribution, you get a tax deduction to apply when doing your taxes next year. With an FHSA, you pay no taxes on investment income and capital gains earned on qualified investments, similar to a TFSA and get tax deductions on your contributions similar to an RRSP. And if you decide on an RESP, the Canadian government offers 20 per cent of the value of your annual contribution in the form of a grant, up to a maximum of $500 a year and a lifetime limit of $7,200 per child

Make your home more energy efficient

By using your tax refund to replace outdated energy-hog appliances, buy a more efficient furnace, or install better insulation or new windows and doors that prevent air leakage, you could lower your gas, electricity or oil bill. Those savings, over time, could then find a home in your investment portfolio.

Upgrade your skills

If you've been considering an educational or training program to boost your skills, your tax refund could help pay for it. You'll not only come away with a stronger resume that may help grow your career and long-term income prospects, but you might also be able to claim a credit on next year's taxes.

Support a cause

If one of your financial goals is to give back, you may want to consider gifting your tax refund to a worthy cause. Any donations you make to a registered charity could be claimed as a charitable tax credit on your next tax return.