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Smart Ways To Use Your Tax Rebate

On average, the tax rebate Canadian’s received for 2020 was $1,850. How you use your tax rebate can have a huge impact on your financial future, even though it might not be evident right away.  It’s important to plan ahead to get the greatest benefit.

What is a Tax Rebate?

A tax rebate is a reimbursement by the government of taxes overpaid by the taxpayer throughout the year. One of the most common reasons for a tax rebate is due to contributions made to an RRSP, which is tax deductible. Other reasons include child care expenses, moving expenses and home office expenses (a new one for many in 2020!).

The Way You Think About Money Affects How You Spend It

Do you think of your tax rebate as a bonus? Does it feel like a big chunk of money you just won? Many of us treat our tax rebate this way and end up spending most of it on a big purchase. This is because we aren’t used to receiving a large sum of money and it feels like it’s “extra”. In fact, the money was yours all along, borrowed from you each month, and then returned to you in one lump sum. 

There are some strategies you can use to change the way you think about your tax rebate and therefore, how you allocate it.

Strategy 1: Tax Rebate Divided By 12

Instead of a lump sum, think of your tax rebate as part of your monthly cash flow.  Divide your rebate by 12 to reflect what it would add to your monthly cash flow.  Example: A $1,850 tax rebate divided by 12 = $154 per month. This monthly amount could allow you to:

  • Make a larger monthly payment to your credit card debt, thereby lowering the interest you owe. 
  • Make a higher monthly contribution to your child’s RESP, in order to receive the free government grant money.
  • Top up your monthly RRSP contribution, so that you get a bigger tax rebate next year.

These are just a few examples. The point is, when you think about the money in a different way, in this case, as added monthly cash flow, it allows you to consider the different ways you can use it.

Strategy 2: Create a Rule for Yourself

Another way to think about how to use your tax rebate is it SET A RULE for it.  A rule will give you a clear direction and help you achieve your money goals.  Here are some examples: 

  • 30% debt, 30% emergency fund, 30% on whatever I want. 
  • Use 50% to catch up on RESP contribution room in order to maximize the government grant. Use 40% for debt. Use 10% for a special dinner.
  • Add 100% to our vacation fund.

The rule can be anything you want it to be, and ideally will move you closer to your financial goals.

Strategy 3: More Money-Saving Ideas

If you don’t like the idea of setting a rule for yourself, and just want some ideas, here are some common things a financial advisor might suggest you do with your tax rebate to help you reach your financial goals faster: 

  1. Top up your RRSP. This will not only accelerate your retirement savings but give you an additional tax rebate next year. 
  2. Contribute to your TFSA. This tax-sheltered account is a smart way to save money while still having access to it if you need it. Depending on how you choose to invest your money (you can have it invested in different ways: cash, ETFs, mutual funds, GICs, stocks and more), you can use this money for retirement, long-term savings strategy for a large future purchase like a home, and as an estate planning tool.
  3. Contribute to your RESP in order to maximize or catch up on the Canada Education Savings Grant. This grant matches your contribution by 20% up to $500 per year and per child. 
  4. Pay down the principal on high interest debt. This will lower your minimum monthly payments, freeing up cash for either more debt repayment or savings.

Financial Advice is a Good idea

If you’re unsure about the best strategy for you, speak to a financial advisor.  Getting help gives you the advantage of removing the emotion from your decisions, since a financial advisor will look at from a more practical point of view. 

In the end, the choice about how to use your tax rebate is always yours, but you’ll feel good knowing that you gave it some thought, sought good advice and are using it to move you and your family further ahead financially.