Canadians are an optimistic bunch this tax season. Two-thirds of tax filers expect to receive a refund this year, according to the latest survey data from TurboTax Canada.

Most financial experts, including me, will tell you that getting a tax refund is not necessarily a good thing – more like a case of bad tax planning. A tax refund means that you paid more than your fair share of taxes throughout the year, essentially lending the government an interest-free loan with your own money!

What To Do With That Tax Refund

That doesn’t stop the majority of us from getting excited – down right giddy – over the prospect of receiving a big, fat, juicy tax refund. But, given the knowledge that a tax refund is just the government giving back your hard earned dollars, what you do with that refund can make a big difference in your finances.

What Are You Doing With That Tax Refund

Let’s say that after filing your taxes you expect to receive a $2,400 refund later this spring. What that really means is you overpaid your taxes by $200 per month last year.

Now think about what you want to do with that refund. $2,400 is a lot of money to receive in a lump sum and it’s precisely the type of refund that gets people thinking about buying a new television or going to Las Vegas for an epic weekend.

We’ve already established that getting a big refund is not a good thing. You’re paying too much tax, or more likely, your employer is withholding too much tax at the source. If you make regular RRSP contributions, for example, or expect to pay a lot in child-care expenses, then you should fill out form T1213 (Request to Reduce Tax Deductions at Source) and then ask your employer to reduce the amount of taxes withheld on your paycheque.

With proper tax planning like this you might have been able to save that $200 per month last year. In this case, would you sock away $200 every month to save up for a new TV or a trip to Vegas in the spring? Probably not. So why do we feel it’s okay to spend our tax refund on a large impulse purchase?

The good thing is that Canadians are feeling responsible when it comes to anticipating how they will spend a tax refund this year:

  • Over one third (36%) plan to pay down debt or a loan
  • Nearly one third (32%) plan to keep it for a rainy day
  • 16% plan to spend some and invest the rest
  • 11% plan to invest in RRSPs
  • 10% plan to take a vacation
  • 5% plan to go on a shopping spree
  • 5% plan to invest in mutual funds
  • 5% plan to pay down their mortgage
  • 3% plan to contribute to their child’s RESP
  • 2% plan to donate it to a registered charity

That’s inline with a little survey we conducted on Twitter this month. Our financially responsible Twitter followers were split between paying down their mortgage or other debt (42%) and contributing to their RRSP or TFSA (41%). Only 12% said they planned on spending their refund to go on vacation and just 5% admitted they’d blow their refund on a shopping spree.

Final thoughts

Even though we tend to get excited about the idea of a large tax refund hitting our bank account in April it’s important to understand where that tax refund comes from – you paying too much in taxes throughout the year.

Getting a tax refund is not an excuse to throw caution to the wind and spend more just for the sake of spending. In fact, if you’re serious about getting the most out of your RRSP contributions then the responsible thing to do is to take your entire refund and put it right into your RRSP.

Less optimal, but perhaps equally responsible is to put that refund into your TFSA or onto your mortgage as a lump sum payment.

Remember, a tax refund is not a windfall or free money from the government. It’s your money! You lent it to the government and now they’re giving it back to you. Now’s your chance to put that money to good use.

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