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Got a large tax refund? Thumbnail

Got a large tax refund?

For many Canadians, getting a big tax refund can feel like an unexpected windfall, even a cause for celebration. But the reality is that a refund means you paid more tax than you needed to last year, which essentially amounts to giving the federal government an interest-free loan.

According to the Canada Revenue Agency (CRA), 57 per cent of Canadians received a tax refund during the 2023 tax filing season. The average refund was $2,262,[1] which is no small amount.

If you regularly get money back, consider opting for a larger regular paycheque instead. For example, an annual refund of $2,262 works out to $188 a month – a tidy sum that can go towards boosting your savings or paying down debt.

How can I reduce the amount of tax I pay?

If you inform the government that you’ll be making non-payroll registered retirement savings plan (RRSP) contributions, they’ll authorize a reduction in the taxes that your employer deducts from your pay.

It’s not just RRSP contributions that allow you to lower taxes deducted at source. The CRA lets you claim child care expenses, alimony, maintenance or support payments, employment expenses, and interest expenses and carrying charges on investment loans – among other deductions – to reduce the taxes you pay throughout the year.

To make a request, fill in and submit Form T1213, Request to Reduce Tax Deductions at Source, to the Canada Revenue Agency (CRA), along with any required supporting documents.

Quebec residents must also complete Form TP-1016, Application for a Reduction in Source Deductions of Income Tax, and file it with Revenu Québec to reduce federal and provincial deductions.

Better ways to use your money

Instead of overpaying taxes, put that money to better use. Of course, what you do with it depends on your financial situation and goals. But using that money to eliminate debt or increase savings can be a terrific way to improve your financial security. Here are a few ideas.

Reduce debt

According to Statistics Canada, the average Canadian household now carries $1.85 in debt for every dollar of disposable income.[2] Why not use that extra cash flow to whittle down how much money you owe?

Credit cards and other loans

Carrying a credit card balance means your hard-earned money is going towards interest charges instead of savings. If your current budget only allows you to make minimum payments, that means you’re barely making a dent in paying back what you owe. Reduce the cost of your loans by paying down high-interest debts first, then tackle the rest.

Pay down your mortgage 

Whether you have a traditional mortgage or a flexible mortgage with a line of credit, the value of reducing your principal sooner can be substantial. You can save thousands of dollars in interest costs and pay off your mortgage faster.

Review the terms of your mortgage contract and make use of all options available without incurring prepayment penalties.

Increase your savings

There are countless reasons to save your money. Whether it’s building a retirement fund, paying for a child’s education, creating an emergency fund or saving for a home downpayment, your advisor can help you determine what’s best for your specific goals.

Maximize your RRSP contributions

An RRSP is one of the most effective ways to save for retirement and depending on your situation, (and your contribution room) it might make sense to increase how much you put in.

Contributions and deductions that generate a tax reduction can be put back into your RRSP for the next year. The earlier you contribute, the longer you can take advantage of the tax-deferred compounding of investment income.

Top up your TFSA

Whether it’s a renovation project or a new tech purchase, contributing on a regular basis into a Tax-Free Savings Account (TFSA) is an ideal way to save for mid- to large-sized expenses, as well as for your retirement. Your investment grows tax-free, and you can withdraw the money at any time without it being taxed. Plus, withdrawals are added back to your available TFSA contribution room in the year following the year of withdrawal. If you’re not sure which registered account to contribute to, listen to this podcast.

Open an RESP

A registered education savings plan (RESP) allows you to save money on a tax-deferred basis for a child’s post-secondary education. The earlier you begin contributing to an RESP, the more you’ll be able to take advantage of compounding investment income and maximize government grants. A contribution of $2,500 can earn a $500 grant, per child, each year, until the end of the year in which they turn 17, up to a maximum grant of $7,200. Learn more about RESPs here.

Contribute to an RDSP

A registered disability savings plan (RDSP) can help families plan for the long-term financial security of a relative with disabilities. Early contributions to an RDSP benefit from compounding investment income and can also benefit from available government grants and bonds.

Open an FHSA

A First Home Savings Account (FHSA) gives first-time home buyers a great option to save for a home purchase. Canadians 18 years and older (who haven’t owned a home previously) can open an FHSA and keep it open for up to 15 years. The FHSA participation room is $8,000 annually (up to $16,000, including unused participation room from the previous year) to a maximum lifetime limit of $40,000. The contributions are tax deductible, and the earlier you start, the sooner you can take advantage of the tax-deferred compounding of investment income. Like a TFSA, qualified withdrawals are tax-free.

Establish an emergency fund

It’s important to have easy access to emergency money to cover unexpected events, such as a job loss, illness, or major home repair. A good rule of thumb is to save enough to cover three to six months’ worth of living expenses. Check out this video for more on emergency funds.

Effective tax planning ensures more of your money is working harder for you throughout the year. Speak with your advisor to learn more about breaking the tax refund cycle and how to put your money to better use.


[1] www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/individual-income-tax-return-statistics.html

[2] https://www.ctvnews.ca/canada/household-debt-level-rises-as-interest-rates-bite-into-cash-flow-1.6440924

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