Page 35 - January2016Spectrum
P. 35
DOLLARS & SENSE
How to be Financially Smart with a Tax Refund
As a result of RRSP contributions, interest expenses, tax shelter deductions or various other tax deductions and credits, you may be expecting, or have
recently received, an income tax refund from the Canada Revenue Agency (CRA). If you receive a tax refund, it may be a good opportunity to determine
if you can use some or all of it to improve your financial well being. Consider the strategies below that may help you use your income tax refund wisely
and assist you in meeting your financial goals.
Saving for Your Future on your home. As the interest on a loan used for personal purposes is not
If you are expecting to receive an income tax refund from the CRA this year, deductible for income tax purposes, you are paying the interest on the loan
then you may be tempted to spend your refund - for example by taking a with after-tax dollars. The higher the interest rate on the loan or the higher
well deserved vacation or doing a minor renovation to your home. In some your marginal tax rate, the more income you have to earn to pay the inter -
cases, this is an appropriate use of the money, depending on your need at est on this loan, so the more beneficial it is to pay down this debt.
the time. You might also consider saving all or a portion of your refund for
your future financial security. The “compounding” effect helps even small RRSPor TFSA Savings
savings grow significantly over the long term, helping you live the lifestyle If you do not have high interest non-deductible debt, then another op-
you want. tion for your income tax refund is to save your refund in an RRSP or a
non-RRSP account. Whether you should save your refund in an RRSP
Starting with your financial plan is always a good first step in determining or non-RRSP account depends on your specific circumstances and sev-
the best use for your refund. You can then review the areas needing addi- eral financial assumptions. If your marginal tax rate in retirement is ex-
tional funding. The receipt of an income tax refund can be a pected to be the same or lower than your marginal tax rate
great catalyst for you to implement some of the strategies in today, then consider contributing to your RRSP; if higher
your financial plan. you may want to consider a TFSA. The TFSA provides a
Preparing your Will or Power of Attorney, setting up your further option for investing your tax refund. The TFSA al-
lows you to make a $10,000- (indexed to inflation- for now
emergency fund or putting adequate disability or life insur- Liberals may change) annual maximum contribution. All
ance in place can be easily done with the average tax refund. growth, income and contribution. All growth, income and
Of course, saving the refund in an RRSP, RESP, TFSA or withdrawals are tax-free. You are also able to gift money
paying down debt are all financially wise saving strategies to your spouse to invest in a TFSA without being caught by
for the funds. The following are some common financial the income attribution rules.
planning recommendations that you may want to address
with your tax refund. EmergencyFund
Address Risk Management Strategies A fundamental financial planning strategy is to have some
money set aside for unexpected expenses or a job loss.
When it comes to managing your finances, you probably un- Erica Tennenbaum, CFP, FCSI In general, consider keeping approximately three to six
derstand the benefits of saving on a regular basis, but what Vice President & Wealth Advisor months of living expenses within a liquid emergency fund.
is equally important, and sometimes forgotten, is ensuring If you do not have an adequate emergency fund, you may
that you and your family are taken care of in the event of your death or dis- want to direct some or all of your tax refund towards its creation. As an
ability. The receipt of your income tax refund can be a catalyst to address the alternative to directing your income tax refund to a savings vehicle that
following three common risk management strategies: may earn little interest, consider obtaining or increasing your line of credit
1. Meet a lawyer to have a Will and Power of Attorney prepared. for emergency purposes only.
2. Ensure you have adequate disability and critical illness insurance.
3. Ensure you have adequate life insurance. Receive Your Tax Refund Earlier
You should ensure that the information you provide to your employer on
Education Savings your CRA Form TD1 – Personal Tax Credits Return is up-to-date. You
If you plan to help your children or grandchildren with their education costs, may have had a change in your personal or family situation since last year
you may wish to use your income tax refund to contribute to a Registered allowing you to claim credits for certain items, such as pension income,
Education Savings Plan (RESP). The first $2,500 of RESP contributions at- spouse or common-law partner amount, caregiver amount and disability
tracts a government grant of $500 – $600 depending on your family income. amount. Letting your employer know of these additional credits will allow
If you have not opened an RESP for your children, the receipt of the CRA your employer to lower income tax deductions at source so you won’t have
refund cheque can be a great way to start making contributions. to wait until your tax return is assessed to receive your refund.
Reduce Non-Deductible debt Having a financial plan is a good place to start in evaluating where to invest your
Consider paying down an outstanding non-deductible debt subject to a high tax refund. Your financial advisor can help you prepare your plan. If you have any
interest rate. Non-deductible debt includes credit card debt, a personal use question or would like more information give us a call at 519-621-1307 or email us
car loan, and a line of credit used for personal purposes or the mortgage at Erica.tennenbaum@rbc.com.
Professional Wealth Management Since 1901
This informaion is not intended as nor does it consitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. Erica Tennenbaum
is a Wealth Manager with RBC Dominion Securiies Inc. Member CIPF. RBC Dominion Securiies Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trade-
marks of Royal Bank of Canada. Used under licence. © 2015 Royal Bank of Canada. All rights reserved.
www.cambridgechamber.com Winter 2016 35
How to be Financially Smart with a Tax Refund
As a result of RRSP contributions, interest expenses, tax shelter deductions or various other tax deductions and credits, you may be expecting, or have
recently received, an income tax refund from the Canada Revenue Agency (CRA). If you receive a tax refund, it may be a good opportunity to determine
if you can use some or all of it to improve your financial well being. Consider the strategies below that may help you use your income tax refund wisely
and assist you in meeting your financial goals.
Saving for Your Future on your home. As the interest on a loan used for personal purposes is not
If you are expecting to receive an income tax refund from the CRA this year, deductible for income tax purposes, you are paying the interest on the loan
then you may be tempted to spend your refund - for example by taking a with after-tax dollars. The higher the interest rate on the loan or the higher
well deserved vacation or doing a minor renovation to your home. In some your marginal tax rate, the more income you have to earn to pay the inter -
cases, this is an appropriate use of the money, depending on your need at est on this loan, so the more beneficial it is to pay down this debt.
the time. You might also consider saving all or a portion of your refund for
your future financial security. The “compounding” effect helps even small RRSPor TFSA Savings
savings grow significantly over the long term, helping you live the lifestyle If you do not have high interest non-deductible debt, then another op-
you want. tion for your income tax refund is to save your refund in an RRSP or a
non-RRSP account. Whether you should save your refund in an RRSP
Starting with your financial plan is always a good first step in determining or non-RRSP account depends on your specific circumstances and sev-
the best use for your refund. You can then review the areas needing addi- eral financial assumptions. If your marginal tax rate in retirement is ex-
tional funding. The receipt of an income tax refund can be a pected to be the same or lower than your marginal tax rate
great catalyst for you to implement some of the strategies in today, then consider contributing to your RRSP; if higher
your financial plan. you may want to consider a TFSA. The TFSA provides a
Preparing your Will or Power of Attorney, setting up your further option for investing your tax refund. The TFSA al-
lows you to make a $10,000- (indexed to inflation- for now
emergency fund or putting adequate disability or life insur- Liberals may change) annual maximum contribution. All
ance in place can be easily done with the average tax refund. growth, income and contribution. All growth, income and
Of course, saving the refund in an RRSP, RESP, TFSA or withdrawals are tax-free. You are also able to gift money
paying down debt are all financially wise saving strategies to your spouse to invest in a TFSA without being caught by
for the funds. The following are some common financial the income attribution rules.
planning recommendations that you may want to address
with your tax refund. EmergencyFund
Address Risk Management Strategies A fundamental financial planning strategy is to have some
money set aside for unexpected expenses or a job loss.
When it comes to managing your finances, you probably un- Erica Tennenbaum, CFP, FCSI In general, consider keeping approximately three to six
derstand the benefits of saving on a regular basis, but what Vice President & Wealth Advisor months of living expenses within a liquid emergency fund.
is equally important, and sometimes forgotten, is ensuring If you do not have an adequate emergency fund, you may
that you and your family are taken care of in the event of your death or dis- want to direct some or all of your tax refund towards its creation. As an
ability. The receipt of your income tax refund can be a catalyst to address the alternative to directing your income tax refund to a savings vehicle that
following three common risk management strategies: may earn little interest, consider obtaining or increasing your line of credit
1. Meet a lawyer to have a Will and Power of Attorney prepared. for emergency purposes only.
2. Ensure you have adequate disability and critical illness insurance.
3. Ensure you have adequate life insurance. Receive Your Tax Refund Earlier
You should ensure that the information you provide to your employer on
Education Savings your CRA Form TD1 – Personal Tax Credits Return is up-to-date. You
If you plan to help your children or grandchildren with their education costs, may have had a change in your personal or family situation since last year
you may wish to use your income tax refund to contribute to a Registered allowing you to claim credits for certain items, such as pension income,
Education Savings Plan (RESP). The first $2,500 of RESP contributions at- spouse or common-law partner amount, caregiver amount and disability
tracts a government grant of $500 – $600 depending on your family income. amount. Letting your employer know of these additional credits will allow
If you have not opened an RESP for your children, the receipt of the CRA your employer to lower income tax deductions at source so you won’t have
refund cheque can be a great way to start making contributions. to wait until your tax return is assessed to receive your refund.
Reduce Non-Deductible debt Having a financial plan is a good place to start in evaluating where to invest your
Consider paying down an outstanding non-deductible debt subject to a high tax refund. Your financial advisor can help you prepare your plan. If you have any
interest rate. Non-deductible debt includes credit card debt, a personal use question or would like more information give us a call at 519-621-1307 or email us
car loan, and a line of credit used for personal purposes or the mortgage at Erica.tennenbaum@rbc.com.
Professional Wealth Management Since 1901
This informaion is not intended as nor does it consitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. Erica Tennenbaum
is a Wealth Manager with RBC Dominion Securiies Inc. Member CIPF. RBC Dominion Securiies Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trade-
marks of Royal Bank of Canada. Used under licence. © 2015 Royal Bank of Canada. All rights reserved.
www.cambridgechamber.com Winter 2016 35
