What to do with your tax refund

National Post

2010-05-01


Make that extra cash count. Use to pay down debt

If you met last night's tax-filing deadline you are no doubt now anxiously awaiting your refund.

Preliminary numbers released by the Canada Revenue Agency on Thursday show that the average tax refund is up $80 from last year, making it nearly $1,500. That begs the question: What will you be doing with your tax refund?

Here are five ways to make your tax refund count:

1. Fund a RDSP for a disabled family member If you have someone in your family with a severe and permanent disability, consider contributing to a Registered Disability Savings Plan. The RDSP is a tax-deferred registered savings plan available to Canadians age 59 and under who are eligible for the disability tax credit.

While contributions are not taxdeductible, all earnings and growth accrue on a tax-deferred basis. A main feature of the RDSPs is the ability to supplement the plan with matching Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) for those aged 49 and under.

For example, if your refund was $1,500, contributing the whole amount to a RDSP could result in up to $3,500 in grants and another $1,000 in savings bonds.

2. Contribute to a RESP for postsecondary education If your kids are under 18, contributing to a Registered Education Savings Plan can produce an immediate return of 20% by way of the Canada Education Savings Grant (CESG).

If your tax refund was $2,500, by contributing to a RESP, you could collect the full 2010 CESG of $500. For refunds greater than that, you could begin to collect prior years' CESGs, retroactive to 1998, up to an annual limit of $1,000 of CESGs per child.

3. Pay down non-deductible debt Since interest paid on money borrowed for personal use -- for example, a mortgage or home renovation line of credit -- is not taxdeductible, consider using some of that tax refund to pay down your debt. Even a modest prepayment of part of your mortgage using your tax refund can result in substantial interest savings in years to come.

4. Top up your RRSP or TFSA If you're one of the majority of Canadians who have not maximized your RRSP or TFSA contributions, consider stashing that refund away in one of these tax-advantaged plans.

If you haven't yet opened up a TFSA, you can contribute up to $10,000 immediately to earn tax-free income and gains for life.

5. Don't let it happen again! Keep in mind that getting a tax refund is actually a sign of poor tax planning because it means you' ve loaned your hard-earned money to the government interest-free.

It's possible to get your tax refund throughout 2010, on every paycheque, instead of waiting until your return is filed. Use CRA Form T1213 "Request to Reduce Tax Deductions at