Get the most out of tax returns

For many Canadians, tax season means a lump sum of money. In fact, the Canada Revenue Agency (CRA) finds the average refund in 2011 was $1,580.

Read: Many Canadians file their own tax returns

“It can be tempting to splurge on luxury items, but many Canadians need to balance paying debt, saving for a child’s education, and for retirement,” says Cynthia Caskey, vice president, sales manager & portfolio manager, TD Wealth Private Investment Advice. “Consider these needs when deciding how best to spend your refund.”

Read: Tax-efficient investing, part 1 For clients who are eager to spend their refunds, Caskey offers the following tips:

• Pay down high-interest debt: This includes outstanding credit card balances. Consider making a lump-sum payment, especially if the interest on the debt is not tax deductible.
• Save for a child’s education: You can contribute to a RESP, which will also potentially qualify them for a Canada Education Savings Grant. The plan will earn tax-free investment income on your contribution and any government grants. Grandparents may consider opening a family RESP plan, which can have multiple children as beneficiaries.
• Create a flexible savings strategy: A contribution to a TFSA can be part of your retirement savings strategy, and interest earned and investment income is not taxed. Because you can withdraw the funds at any time, it is a great option as an emergency fund. Have at least six months of living expenses set aside for contingencies.

Read: Tax tips for students

And here are some tips so clients get more on their tax returns next year:

• Take a year-round approach: Reviewing asset allocation throughout the year may help ensure investments are allocated to maximize tax efficiency. Consider contributing to your RRSP regularly, instead of making a lump-sum contribution so you can take advantage of compound interest.
• Invest efficiently outside RRSPs/TFSAs: Determine an appropriate asset mix and consider investment solutions based on tax efficiency. For example, Return of Capital distributions may be received tax-free, but they reduce the adjusted cost base of the investment. Also keep in mind capital gains are taxed at half the rate of interest income.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.