Canadians still have until April 30 to file their 2025 income tax but refunds are already rolling in for the early birds.
According to the Canada Revenue Agency (CRA), the average refund hit $2,300 last year. For taxpayers who took advantage of all available credits and deductions, or by making hefty contributions to their Registered Retirement Savings Plans (RRSP) and other registered investment plans, it could be much higher.
If you’re tempted to blow it on something fun, there’s nothing more fun than compound returns. Here are five ways to reinvest your tax return for a payoff that could last a lifetime.
Invest in your debt
On average, Canadians owe $1.75 for every dollar of income, according to Statistics Canada.
Just as investments compound over time, debt compounds in reverse. Investing your tax refund against debt is a risk-free, tax-free, way to generate a return equal to the rate you are paying.
In other words, paying down the balance on a credit card that charges 18 per cent is similar to generating a return of 18 per cent.
No guaranteed investment pays off like that. The only comparable investments are guaranteed investment certificates (GICs), which currently pay out about 3.5 per cent annually.
Re-invest in your RRSP
The refund from a large RRSP contribution could reach 50 per cent for those with large incomes. They are great for tax-free investment growth over long periods of time, but the biggest tax advantage only comes if the refund is re-invested.
If you are one of the many Canadians who scramble every February to make your RRSP contribution before the deadline, consider getting a jump on this year’s tax savings by re-contributing your refund.
In addition to taking some of the pressure off, re-investing your refund will generate another refund next year, and that re-invested refund will generate another refund - and so on.
Re-investing refunds can super-charge RRSP savings over the years but it’s important to keep in mind that all those contributions, and all the returns they generate will eventually be taxed when they are withdrawn.
The trick is to make RRSP contributions when you are paying tax at a high marginal rate and withdraw when you are at a low marginal rate - ideally, in retirement.
Divert your refund to a TFSA
If you are concerned your RRSP is growing too much or if you currently pay tax at a low marginal rate, consider re-investing your refund in a Tax Free Savings Account (TFSA).
Unlike an RRSP, TFSA contributions can not be deducted from taxable income. On the bright side, TFSA withdrawals are never taxed. Like an RRSP, they can hold just about any investments.
Ideally, the right mix of savings in an RRSP and TFSA will allow you to withdraw from your RRSP at the lowest marginal rate in retirement and top-off any further living expenses from your TFSA.
Ottawa has permitted another $7,000 in TFSA contribution space for 2026. Total allowable amounts vary depending on individual circumstances but the total allowable amount since it was introduced in 2009 is now $109,000.
Save for a down payment on a first home
First time homebuyers can reap huge tax savings on a down payment through a First Home Savings Account (FHSA).
The Federal government incentive allows them to save up to $8,000 a year to $40,000. Contributions are tax deductible and withdrawals are tax free when you buy a home.
The Home Buyers’ Plan (HBP) also allows them to withdraw up to $60,000 tax-free from an RRSP to buy or build a home, provided it is paid back within five years.
In addition, the First-Time Home Buyers’ Tax Credit provides a non-refundable tax credit of $10,000, resulting in a $1,500 tax reduction.
A New Housing Rebate also offers a partial or full GST/HST rebate of up to $50,000 on new or substantially renovated homes.
Invest in your child’s education
Investments in a Registered Education Savings Plan (RESP) provide tax-sheltered growth until the cash is withdrawn according to the child’s marginal tax rate to pay for post-secondary school education.
Ottawa will match contributions by 20 percent or $500 of the first $2,500 contributed annually to a maximum of $7,200.
