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Eight ways to put your tax refund to work

The annual spring ritual is already underway — the mail out of tax-refund cheques to millions of Canadians. Every year, the federal government returns billions of dollars in overpaid taxes. The average refund in 2007 was approximately $1,400 — not a huge windfall, but still a sum that would be a shame to fritter away. As you know, your tax refund is not found money, it was your money all along that you lent Ottawa interest-free for the year. These funds should be put back to work for you.

Here are some suggestions:

1. Pay down consumer debt

If you have consumer debt and other non tax-deductible loans, now is a good time to pay them off. Start with the highest-interest cost-first loans first, such as credit cards with double-digit interest rates.

2. Pay down your mortgage

Even though mortgage rates are relatively low now, sometimes it just “feels right” to pay down your mortgage. Further reducing your debt levels will give you increased financial flexibility.

3. Beef up your emergency fund

Every household should have an emergency fund that’s sufficient to cover three to six months’ worth of expenses in an easily accessible, liquid investment such as a money market fund. If yours doesn’t measure up, your tax refund can give it a needed boost.

Consider starting a tax-free savings account, which will allow you to put up to $5,000 per year in an account without paying taxes on the interest, dividends, or capital gains earned in the plan, even upon withdrawal.

4. Contribute to your RRSP

Make a lump sum payment contribution to your registered retirement savings plan for the current tax year. Not only will it ease the pressure when next RRSP season rolls around, but the sooner you make your annual contribution, the sooner it starts compounding in a tax-sheltered environment.

Or, depending on your situation, you may opt to “top up” and make the maximum annual contribution possible or “catch up” by using up any carry-forward room.

If you borrowed money to make an RRSP contribution last year, use your refund to help pay down the loan. You will save on interest charges (which are not tax deductible) and free up the money that would otherwise go to your monthly loan payments. Use those funds instead to make monthly contributions to your RRSP for the current tax year.

5. Start a registered education savings plan

An RESP is a great way to save for your child’s post-secondary education and realize potential tax savings. Although the contribution is not tax deductible, there is no immediate taxation on any interest, dividends, or capital gains earned within the plan. You can also take advantage of the Canadian Education Savings Grant, a program in which the federal government will contribute up to $500 per year per child.

6. Give to charity

Share your windfall by making a donation to a registered charity. It’s a win-win situation. You not only contribute to a good cause, but also receive an income tax credit.

7. Buy some peace of mind

While no one likes to think about being stricken by a serious injury or death, the best time to protect yourself against the potentially devastating financial effect that a disability or death could have upon your family is now. Disability and life insurance are important components of overall financial health. If you already have insurance, you may want to revisit the coverage amounts to ensure they match your current needs.

8. Take a holiday

Sometimes you just need a break! Given the current economic conditions, there are some great deals to be had. Check out the article “More Sun for the Money: Beach” on for ideas.

Alan Acton is a financial adviser in Ottawa and can be reached at The opinions expressed are those of Alan Acton and not necessarily those of Raymond James Ltd. Statistics, data, and other information are from sources believed to be reliable, but their accuracy cannot be guaranteed. This document has been prepared to assist individuals with financial concepts and is for informational purposes only.