Managing Your Money

Spend it, save it, pay it off – the best uses for your tax refund

It’s usually better not to get a tax refund but if you are getting one the key question is what you should do with your refund. You could simply spend it but there are other alternatives with longer term benefits for your financial future:

• Immediately use your refund to make up your 2015 Registered Retirement Savings Plan (RRSP) contribution and you’ll get the benefit of nearly an extra year of potential long-term tax-deferred growth plus a tax deduction against next year’s taxes.

• Contribute to investments held in a Tax-Free Savings Account (TFSA). You are allowed to invest up to $5,500 a year in a TFSA. Your contributions are not tax-deductible but you will not be taxed on the investment income generated by the investments in your TFSA, you can make tax-free withdrawals for any purpose at any time, and you can re-contribute any of those withdrawals in a future year.

• Invest it. If your RRSP eligible investments and TFSA are topped up, consider adding your refund to your non-registered investments. The most tax-efficient strategy is to hold stocks and equity mutual funds outside RRSP eligible investments or a TFSA because these types of investments are taxed at a more favourable capital gains inclusion rate plus dividends from most Canadian corporations are eligible for the dividend tax credit.

• Pay for your kids’ education. Set up Registered Education Savings Plans (RESPs) to fund their future education costs. Contributions to investments within a RESP are not tax-deductible but their growth is tax-deferred and they qualify for Canadian Education Savings Grants (CESG)* of up to 20% of your contribution for the first $2,500 you contribute in your child’s RESP each year.

• Pay down costly, high-interest credit debt and then pay down non-deductible debt such as your mortgage – a single prepayment could potentially save hundreds, even thousands of dollars in interest payments.

• If your refund is large consider parking that cash in a short-term investment that you can access without penalty. That way, you’ll have a ready source of money for a rainy day or a larger purchase – a new car? – without having to borrow or use credit. (A TFSA is also a good rainy day fund.)

Getting a tax refund feels good – what will feel even better is talking to your professional advisor about not getting one next year as part of a comprehensive tax-reducing financial plan that will make it possible for you to achieve all your financial and life goals.

*CESG is provided by the Government of Canada

Invest in your kids

You want your kids or grandchildren to have rewarding lives, both personally and financially, and one good way to help make that happen is to invest in them — through a Registered Education Savings Plan (RESP). In today’s highly competitive world, having a post-secondary education is a definite advantage. According to Employment and Social Development Canada*, over the span of a career, higher education means higher growth in earnings. For example, in 2000, growth in average earnings between the ages of 25 and 54 was 49% for those with a high school diploma, 53% for those with a college diploma, and nearly 100% for those with a university diploma.

Yes, a post-secondary education is expensive – in 2010-11, the average cost of a four-year program was approximately $58,000** — and rising every year. But it remains a great investment – that’s why so many Canadians are saving for their kids’ education. Statistics Canada reports that 7 in 10 Canadian children 17 years old and younger had savings set aside for their post-secondary education and more than three-quarters of those with savings had an RESP***.

Here’s why an RESP is a great way to invest in your kids:

• You can contribute as much as you want each year up to a lifetime limit of $50,000 per child – so you can manage your contributions according to your annual budget.

• For each child’s RESP, the government will add up to 20% of contributions (to a maximum of $1,000 each year, and up to a lifetime grant limit of $7,200), via the Canada Education Savings Grant (CESG) program.****

• Lower income families may be eligible to receive additional CESG amounts as well as the Canada Learning Bond (CLB)****.

• Your contributions aren’t tax-deductible and withdrawn contributions by your enrolled child aren’t taxed. Educational Assistance Payments, which consist of CESG, CLB, and plan income or growth, are taxed at the student’s income level, meaning your child will likely pay little or no tax on those withdrawals.

• Your child can access RESP funds as soon as they enroll in an approved post-secondary program.

• If your child decides not to pursue a post-secondary education, contributions may be returned to the RESP subscriber or the RESP can be transferred to another child.

• Any contributions remaining in the plan after your child finishes their education are yours to use as you wish.

Investing in a RESP is a good decision and your professional advisor can help you achieve financial stability for you family and a debt-free education for your children or grandchildren.

* www.hrsdc.ga.ca http://www4.hrsdc.gc.ca/.3ndic.1t.4r@-eng.jsp?iid=54#a2

** CanLearn http://www.canlearn.ca/eng/planning/saving/cost.shtml

***The Daily, Wednesday, October 29, 2014

****The Canada Education Savings Grant and Canada Learning Bond are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.

Müge Aydın

Muge Aydin was born in 1981 in Istanbul and she holds a BA degree in Economics from Anadolu University, Turkey. She completed her undergraduate studies in 2003 and continued her education at University of Gloucestershire in England where she received her Certificate in Business in 2004. She returned to Istanbul, Turkey in 2005 and started to work in financial services industry as an International Trade Operations Specialist and later as a Corporate Sales representative until she immigrated to Canada in 2009. Muge graduated from the Financial Services Practitioner Post Graduate Diploma program at Seneca College in 2011 and currently works in the financial services industry in Toronto.