Canada issued more than $31 billion in tax refunds in 2021, with taxpayers receiving nearly $1,900 on average per return.
This money makes a considerable difference in Canadians' lives. That's why it's essential to spend your tax refund responsibly.
What's the best way to spend your tax return? Should you spend it on one important purchase or save it for the future? Thinking about these questions is the first step toward responsible spending.
The next step is understanding how the tax return process works to receive your refund as quickly as possible.
A tax refund, also known as a tax return, is the amount of taxes you overpaid to the Government. In other words, if the Canada Revenue Agency (CRA) collects too much tax from you during the year, they'll return that money to you in the form of a tax refund.
If you're expecting a return, you must file the appropriate paperwork with the CRA. In this case, you'll file the T1 General form, also known as the "Entitled Income Tax and Benefit Return." This document is the primary tax form Canadians use to file personal income taxes.
You'll also find out if you owe any taxes during the filing process.
You should also file a return if you want to receive the following benefits, as well:
Even if you made zero income for the year, you still need to file a tax return to receive possible tax credits and benefits.
You'll also have the chance to claim any medical or child expenses. The more qualifying expenses you can write off during tax season, the higher your refund. You can also claim disability deductions if you're eligible.
Filing your taxes doesn't necessarily result in a refund.
If you owe taxes, you will not receive a refund if the owed tax amount is greater than the return. That's why it's important to claim as many eligible deductions as possible.
Tax refunds may be sent via check or directly deposited into your bank account. If you want to receive your refund quicker, direct deposit is faster than paper checks. Furthermore, the earlier you file your paperwork, the quicker you'll receive your return.
The average tax refund can take as little as two weeks or as long as 16 weeks to arrive.
Delivery time depends on the following factors:
If you e-file your tax return early online, expect your refund within two weeks. Paper-filing takes longer to process. You can expect your paper-filed return within eight weeks.
Nonresidents can wait as long as 16 weeks for paper-filed tax refunds.
If you want to get your refund as quickly as possible, remember to e-file before the deadline and choose direct deposit as your delivery method.
Use any certified tax software. Canada's preferred electronic filing services are NETFILE and ReFILE. You don't have to download anything.
If you're behind on your taxes, you may not be eligible for electronic filing.
For example, any tax returns filed for years prior to 2016 must be mailed or processed in person. You can also get tax assistance from a CRA agent.
The individual income tax deadline in Canada is April 30th. If you're self-employed, you have until June 15th to file your paperwork. However, you must pay any owed tax balances by the end of April.
You don't have to wait until April to file either. Instead, file as soon as the tax year is over and receive your refund even earlier.
If you file early, you can always check the status of your return. First, you'll need to register an account with the CRA. Your CRA account will display your refund status; plus, you can update your delivery method details.
Filing early gives you time to budget your incoming tax refund.
Take a step back and calculate your general cost of living. For example, the average cost of living for individuals in Canada is $2,743, while the average monthly cost for a 4-person family is $5,198.
These expenses include your rent (or mortgage), food, personal care, insurance, and transportation. If you have a family, you must consider childcare, education, and the cost of quality time.
Plus, everything from inflation to health crises can impact these costs and your ability to pay expenses.
Tax refunds aren't found money, lottery winnings, or gifts. It's your money, money that's owed to you. How can you best invest this money to improve the long-term quality of your life?
Debts are a financial and emotional burden.
Thankfully, the average tax return is enough to pay down considerable credit card debt. You could pay off nearly $2,000 or more in credit card debt, even a few hundred dollars can go a long way.
If you owe multiple balances, prioritize your debts.
Focus on high-interest debt. Do you have a high-interest personal loan or credit line? Now is an excellent time to pay that down.
Paying down debts also increases your credit score. Higher credit scores make you eligible for more loans, lower interest rates, and generous payment terms.
Your mortgage is another priority.
Some mortgage terms don't even require payments for a set amount of time. However, if you pay off your loan before the due date, you may enjoy low to 0% interest as a perk.
Take a look at your mortgage terms to see how your refund could help. You could use your refund for a down payment or get a head start on payments.
What about your home? Have you been putting off much-needed repairs like new siding or plumbing?
You could apply your tax refund toward new roofing, windows, or flooring. Even a small refund is enough for a fresh coat of paint.
Home insurance is another wise investment. Housing damage could happen in an instant. It's always good to be prepared.
Economic hardship is common. You could be suddenly laid off or tasked with caring for an ageing parent.
Do you have an emergency fund for these situations?
Put your tax refund into a savings account for safekeeping. Savings accounts also accrue interest, increasing the total over time.
Transportation is a necessity for families. Use your tax refund to pay down your auto loan. You could also pay for any critical repairs, like brake pad replacements and oil changes.
If you don't have any outstanding debts or emergencies, you can still invest that money toward your future.
Do you want to live comfortably after you retire?
Invest your tax refund into a Registered Retirement Savings Plan, more commonly known as an RRSP. Your partner may contribute their refund to your RRSP too.
There are several benefits to investing in an RRSP.
For starters, you don't have to pay any tax on your RRSP earnings as long as those earnings remain in your plan.
When you're ready to retire, you can transfer your RRSP money into an annuity plan or a Registered Retirement Income Fund, known as an RRIF. Moving your money into these plans converts your RRSP into regular, stable payments.
Another smart investing tip is to put your refund into a Tax-Free Savings Account, commonly known as a TFSA. Of course, you can max out your TFSA to save even more.
If you want to ensure the maximum contribution, you can automate your contributions. For example, you could automate monthly bank withdrawals to reach your maximum contribution every year.
Your tax refund can give you a leg up in your TFSA contributions, helping to secure your financial future. Just be careful not to overcontribute or you will be taxed on the excess amount.
Don't forget to leave time for yourself. Take this opportunity to do something good for yourself and your community.
Donating your refund is an excellent idea. Giving back boosts your mood and the lives of those around you.
Plus, you could be eligible for Canada's Charitable Donations Tax Credit. Donors can receive credits for 33% of the total donation.
Are you long overdue for some time off?
Use your refund to pay for a much-needed vacation. You could save money with budget flights, lodging discounts, and more.
Vacations are the perfect time to enrich your mind.
Sign-up for an art class or writing course. You could finally learn business 101 and start your own company.
Do you feel stuck in your career? Enroll in a professional certification program to turn your job prospects around.
Reflect on your tax refund. How could your return help your future, family, or community?
Keep this guide close as you invest your tax return wisely. And if you need an insurance quote, we've always got your back.