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Dale Jackson

Personal Finance Columnist, Payback Time


With the tax filing deadline behind us, many Canadians are thinking about how to spend their refund. It was about $1,900 on average last year, according to the Canada Revenue Agency, but those who made hefty contributions to their registered retirement savings plans (RRSPs) before the March deadline can likely look forward to a hefty refund.

The tax refund that normally comes in the spring is often thought of as fun money. If your idea of fun is a secure financial future here are three ways to put that refund back to work for you.

1. Pay down debt

Banks and bank sponsored pundits are often reluctant to suggest paying down debt over investing. That’s because their investment and lending arms are two separate revenue generators that fuel profits via fees from investing and interest on debt. Those profits would shrivel if everyone paid down their debt instead of investing. 

From a pure investment perspective, each dollar invested in paying down debt generates a risk-free, tax-free, return equal to the interest rate being charged.

The only comparable investment is a guaranteed investment certificate (GIC), which yields less than 1.5 per cent.

Choosing to invest your tax refund in credit card debt, which can be in the 20 per cent range, is a no-brainer. So is student or consumer debt, which charge rates at about ten per cent.

The only debt that might get a pass is mortgage debt, which is generally under three per cent.  

2. Right back in your RRSP

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 boost 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to keep in mind that all those contributions, and all the returns they generate, will eventually be taxed when they are withdrawn.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.

If RRSP savings grow too much you will eventually be forced to make withdrawals at a higher rate, and benefits such as Old Age Security (OAS) could be clawed back.  

3. Tax-Free Savings Account

If you are concerned your RRSP is growing too much or if you currently pay tax at a low marginal rate (because your income is low), the best choice to re-invest your RRSP refund is likely a tax-free savings account (TFSA).

Unlike an RRSP, TFSA contributions can’t be deducted from taxable income. On the bright side, TFSA withdrawals are never taxed. Like an RRSP, they can hold just about any investment.

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.  

As of Jan. 1, the government has permitted another $6,000 in TFSA contribution space for 2021. For anyone who was 18 or older when the TFSA was launched in 2009, the total contribution limit is $75,500.

The feds are expected to continue adding TFSA contribution space in future years, which means it could become a permanent home for your RRSP refunds.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email