This is a re-post but highly relevant.  Enjoy!

As most people filed their tax return before the income tax deadline, it’s now a matter of waiting for that juicy tax return.  Most consider tax refunds to be “free money” that was unaccounted for.  And it’s true, you can do whatever you want with the money.  However, in my opinion, tax returns should be used wisely as it’s basically money that you overpaid to the government during the year.

Although they may seem like common sense, here are my some ideas on how to use that tax refund:

1. Pay Down High Interest Debt

If there is credit card or other consumer related debt on your personal balance sheet, then all “unplanned” income should pour into high interest debt.   Paying down a 19% rate credit card balance, is the same as returning 19% after tax (guaranteed) on the market.  Good luck finding a GIC with that kind of yield.

2. Pay Down Your Mortgage

I must admit that when people ask on what to do with their excess cash flow, besides the obvious of high interest consumer debt, paying down the mortgage is probably what I suggest most.  There are a couple reasons for this.  First, paying down the mortgage provides a guaranteed after tax return, second, it’s dead easy to do.  Even though investing in the markets may outperform paying down the mortgage balance (if rates are low), not everyone has the time or patience to learn how to invest.

3. Contribute to your RRSP

I remember a while back when I read Preet’s RRSP Book that it had many examples of RRSP vs non-reg portfolios.  To my surprise, the non-registered portfolios can very close in after tax returns.  The conclusion was that RRSP’s are superior only if the tax refund is reinvested or used to pay down debt.   What does that mean for you?  If you contributed to an RRSP, at the very least, take the portion of your tax refund attributed to your RRSP contribution and reinvest it/pay down debt.

4. Contribute to your TFSA

Depending on your situation, it may be more efficient to contribute to your TFSA.  Certain cases like employees with a generous defined benefit pension plan where retirement income will be fairly high, the tax free withdrawals from the TFSA during retirement is welcomed.  In addition, TFSA withdrawals do not count as income, thus will not be used in senior benefit clawback calculations.

5. Contribute to an RESP

Here’s something a little different.  If you have children, if you contribute $2500 per year to an RESP, you can receive the max government matching of $500.  The account can grow tax free and withdrawals are taxed in the hands of the student when they start higher education.

6. Build your Emergency Fund

Having a large emergency fund may not be required for every situation, but I believe that having some liquidity is extremely important in every household.  If you haven’t started a cash emergency fund, one way to fund it is with the tax refund.

7. Invest in Yourself

Instead of investing the tax refund in the market, consider investing the money in yourself (or your business).  Most of the money accumulated in your life will be due to your career or your business.  Take courses, improve your credentials, even buy some books.  Do something that adds value to your company, whether you own it or not, it will bring benefits.

Final Thoughts

This year, I ended up with taxes owning with my wife expecting to receive a refund.  Going down the list, we’ll most likely use the refund to contribute to our RRSPs.  Back to you, how will you be using your tax refund?

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Well, it isn’t frugal, but I’m using my paltry refund to take my wife on an Alaskan cruise for our 20th wedding anniversary. I paid in over $31,000 in taxes, but got about $900 back. Thankfully, I’ve been saving for this trip because it sure cost a lot more than $900.

We’re looking to pay down debt. With this year’s tax refund, and the money from a second car we’re hoping to sell soon, we’ll be almost completely free of non-mortgage debt!

If you don’t have a plan (aka a budget) that takes tax returns into account, then you are either not contributing enough to RRSP’s (i.e. only getting a few hundred back a year), or you really like flying by the seat of your pants!

Make a plan – it doesn’t have to be detailed – figure out your (family) priorities and make sure that you use any excess monies for that first.

1/3 – RRSP
1/3 – saving for some renos
1/3 – give it away.

go $6K back – $3K went to my RRSP (it was the refund from my contributions) and balance went to pay down my student loans.

I’ll be the first to admit it… we’re planning to spend it all!!! or as much as we can on a vacation.

My refund:
– made my student loan go away
– bought a new computer
– added to my TFSA and RSP

i have never been one to get a check back and go spend it right away. i think that is how the problem started in the first place. People with little or no money, when the get a check to spend it on items that they don’t really need in the first place and the vicious circle goes round and round.

Every year we use our refunds to pay down our mortgage by $8k. Anything in excess of that is ours to do with as we please. This year I got back $9600 so I’m taking the the remaining $1600 and rolling it back into my RRSPs. Fun!

I got my work to reduce the amount deducted at source, so my refunds are paltry.

I don’t like the idea of loaning the government my money for a year at no interest.

I’m getting a $15,000 refund. I overpaid by a lot last year. I changed jobs last year, The government held back a big chunk of my severance.

Its all going into Dividend Stocks in a non taxable account.

I only have mortgage debt, and maxed both my RRSP and TSFA and I don’t have kids to make an RESP.

if i would get a substantial windfall at this time, i think i would expand my online business and if there is more remaining, get a macbook pro :)

I always considered it to be a laughable notion how taxes are considered free money. What they tend to leave out of the equation is how much gets taken away from you.

Receiving a tax refund is what I would also consider a rather powerful test of character. Come 1000, 9000 dollars, it baffles me to see how quickly people part ways with that money. Not a dime of it goes into their assets.

With a return like that, I’d immediately max out my TSFA investments and go straight into buying stocks and commodities with the rest.

Donated a little over 10% of my refund to charity. Paid off credit balance (normal monthly activity). Put money aside for a big shopping trip planned for June. Added some money to our savings.

My refund was higher than normal due to my wife being on maternity in 2009, the fact we contribute 10% of all our income to a charitable organization, I received a bonus at the end of 2009 which I had re-directed to my rsp instead of taking it as cash and finally the pension adjustment for my defined benefit plan and my pay roll rsp contributions.

It’s a little late for this now, but for anyone who planned to reinvest the refund into their RRSPs, I recommend doing an RRSP gross-up at the end of Feb instead.

A gross-up basically gets the multi-year refund into your RRSP sooner. Normally you’d get a refund this year, invest it for a smaller refund next year, which generates a smaller refund the year after, etc. Instead you put all that money in before the tax deadline, and pay yourself back with the tax refund.

To figure out your grossed-up amount take your RRSP contributions and divide them by (1 – tax rate). So if you contributed $1000 and pay 40% tax your grossed-up amount is $1666. Which means if you add $666 to your RRSPs just before the deadline, then file your taxes, you’ll get back $666.

If you do it the ‘slow’ way you’d get back $400, and then the year after get back $160, then $64, etc.

Not sure if Aury’s comments are directed at me (since I’m the only one planning to spend my whole refund)… but in my defense,

we’ve already maxed our TFSAs ($10k in on Jan 5), topped up our mortgage by $20k, and saved $2k/month in non-registered accounts for a future RESP, and mat-leave planning.

Time to spend a little on ourselves methinks ;)

Used my tax refund to repay the money I borrowed to max out the spousal RRSP contribution I made for my wife.

All of it went onto the student loan. Sure doesn’t sound like very much fun, but the liability section of my net worth statement sure likes it.

I’m with you Sampson.
I’m spending them all as well.
Mortgage finally paid off. Maxed TFSA. RRSP already accounted for.

I think time for a small weekend getaway with Mrs. ;)

I didn’t get too much back this year but I intend on building my emergency fund so that I can have a decent amount of money to fall back on in the case of any emergency.

Emergency fund…sadly depleted by emergencies!

1/4 investment in my business
1/2 given to the Cancer Society and the Pain Coalition
1/4 investment in my parents’ home renovations!

Mortgage. With interest rates going higher soon, it will be good to have a lower mortgage.

Put me down for vacation! All well planned though with the finances. Nothing wrong with having a little holiday if you can afford it.

It always baffles me that people think of their tax refund as free money. But if they received it during the year they’d probably have a bigger house/newer car etc.

Mine doesn’t affect my spending at all, because I’ve already topped up my RRSP and I was expecting it.

I actually pay all my insurance this month so really it just offsets that expense on my networth

I would like add one more point in there. Here it is-
One can also put the tax returns towards retirement contributions. most of young people do not have enough money in their retirement accounts so this would be the perfect opportunity to grow that retirement fund.

Hey Frugal,

This year, we chose the mortgage pay down. You’re bang on, not only do we feel it guarantees our after tax return; it’s easy and it instantly increases our net worth. I liked seeing our net worth rise last month by almost 3%!!!


@Sampson – I think you’ve earned it!

I plan on putting 75% away into my savings and spending the rest on some much needed “me” time.

Great article, love your thoughts with what can be done with your tax refund.

haha i like the “spend it on vacation” comment, we got a refund of around $3400 and the week after we received our refund, we got our property tax bill, 1st half $1700, go figure, get it back from the govt and give it to the city.

However i have a question, the wife is expecting and plans to take a year off come September, (side note-we should have around 15K saved in TFSA’s by that time), we have no debt but mortgage, both under 30 yrs old and Im wondering what some of our options are to keep our heads above water with the lack of her income? Im guessing a few financial savvy readers have taken the family route as well and could offer up some advice….thanks.

My employer doesn’t take much off my checks, so I won’t get over $1k back. But whatever amount I do get back, 100% goes into savings.
I would rather save and invest as much as my hard-earned money into what I want, and not let the government hold onto it.

And I agree with other readers how its definitely not free money. When I do my monthly excel spreadsheet, If I get tax refund it goes into my earnings. Because any refund you receive, is money that you worked for.

1500 Travel fund, 1000 reno fund, 500 emergency fund.

I spent about 600 on a bicycle, than tossed the rest into my tfsa. I try to pick up stock sin my tfsa then roll them over into my RSP come next year. And its an excellent time to buy in my opinion.

If you expect your retirement income to be so high that RRSPs don’t make sense now and you’re therefore putting all your money in a TFSA instead, why are you concerned with senior benefit clawbacks? Those benefits will already be completely cut if your income is high at retirement.

In the last 10 years, I can think of only one year where I received more than $500 for a refund. What is everyone doing wrong with tax planning that you get these massive refunds? I can understand severance lump sums and such..

Hi FT,

In financial circles, a tax refund is often considered to mean that you lent the government your money at 0% interest for a year. With proper planning, you should be able to have less tax withheld during the year, instead of getting a refund.

In practice, you are right, though. It is difficult to have less tax withheld for many planning strategies that create tax refunds (such as RRSPs or Smith Manoeuvre).

You can have less tax withheld by advising your employer on the TD1 form or you can apply every year to CRA. The TD1 only allows for the main tax credits that many people get, such as dependents or education costs. You can apply for a much wider variety of reasons, but that is a pain. You need to apply every year with evidence and CRA often takes a couple of months to respond.

Of course, it is easy for self-employed people that pay installments, because they can adjust their installments based on the actual tax they expect to pay.

Many people prefer a refund anyway. If you get an extra $100 every 2 weeks, by the end of the year, you probably don’t know where it went. But if you get a tax refund of $2,600, you can do something smart with it and you will remember where it went.


My wife and I got about 15k this year – we choose not to change our standard of living when faced with windfall. It all goes in the down payment fund. We’re planning on getting a deal on a house in a couple years or so once the Canadian financial industry catches up with the rest of the world and the housing market tanks (Yes it will happen – if you deny this, you might as well deny gravity, dummy).

I see the fund as advance pay downs on the principal of the house we will eventually own. We live in a great place now but we rent for about 1/2 of total carrying costs. As the fund increases and house prices decrease, the lines will eventually converge at an all cash purchase or a small mortgage with minimal impatience charges (interest).

Re:31. Dwight

Congradulations, my son is now 7 months old. We started living based on 55% of my wifes salary. Used the difference to build savings you’d be surprised by the little costs that show up that you haven’t planned for. Also be prepared as EI takes time once filed to be received.

We are buying a rental!

As Ed alluded, there are some situations that even a letter to CRA won’t fix. I annually sent a letter asking for reductions to tax withheld at source and cited annual large tax refunds. They never would meet my requests so I ended up with large refunds.

But that is a different story now. The years of big tax bills have begun. :(

Being an investor, I put my annual refund into my non-registered brokerage account to purchase investments. Given how the market has been the last two weeks, it has been a good opportunity to get good value at great prices. =)

But in general people should prioritize paying down high interest debt, creating an emergency fund, and also work on their mortgage, all three of which also creates a guaranteed return in a sense.

I put my whole refund (just over 4K) down on my mortgage. Because of non-ideal considerations I ended up buying my house with less than 20% down. This isn’t the end of the world as it is extremely cheap and I am very young. I am steadily working towards the 20% mark so I can begin the Smith Manoeuvre and look forward to large refunds every year for the rest of my life (or, like Ed says, try to get the government’s hand out of my pocket during the year).

I agree, I can’t be bothered to try and adjust the amount of taxes I pay at the source – especially if I have to do it annually and have lots of documentation to justify it.

I also agree that many people, including myself, indirectly benefit from the forced savings that come from a tax refund. Having a sizable chunk of money to do something smart with can be very beneficial.

I usually use my tax refund to either pay down the mortgage or invest, but after many years of doing that this year I chose to do something completely different and buy a boat. You only live once!

I am planning to spend the $5K refund on setting up a family trust and getting will done for me and my spouse.

If we were not setting up the family trust, we would have put all of it for our RRSP.

Mortgage – with interest rates maybe going higher soon, it will be good to have a lower mortgage.

Max R.R.S.P. contribution room, pay back R.R.S.P. Home Buyer’s Plan, pay down debt, home maintenance and renovations(which I think should be tax deductable like child care expenses). This allows me to turn my R.R.S.P’s into R.R.I.F which inturn will become T.F.S.A. Thank you for providing such a great resource.

I disagree with your assessment regarding the Real Estate housing market tanking. And I’m not a dummy either. At the very most Canadian housing values may level off or slow down but investing in a home is still one of the surest ways to personal prosperity. At times it may feel like it’s the “turtle” route, however the U.S. can appreciate how their “hare” stategies affected their economy. If you’re in the market to purchase a home I would consider doing so while the interests rates are low and perhaps opting for a open variable might be something to consider as well. You mention putting your refund into a down payment account. Therefore I assume you have maxed your R.R.S.P. contribution room. If not please consider that you can borrow from your R.R.S.P. to purchase your home. This is an excellent way to increase your downpayment too. And if you know that your parents have named you in their will you may consider asking them to give you that inheritance early so that you can put it towards your purchase. I did that and my return was over 100 %.

Ed I appreciate your premise regarding huge tax refunds. That said you also have to remember that you are also taxed on the interest you make unless of course it’s in a T.F.S.A. Which only allows $5,000.00 per year. So perhaps lending the government a loan at 0% isn’t as bad as it seems considering how interest on non T.F.S.A. is taxed. Personally I prefer a huge tax refund because then I can call the tax man Santa in March… etc. LOL!