What to do with your tax refund?
After tax season, here comes… tax refund season. What might be a good thing to do with this little windfall?
May 13th, 2025
Every year, millions of Canadian taxpayers receive tax refunds. This is their repayment for the excess tax they paid to the government during the year, after factoring in the tax credits or programs they qualify for and the deductible contributions they’ve made, such as registered retirement savings plan (RRSP) contributions, for example.
In the past year alone, between February 8, 2024, and January 27, 2025, the federal government reports having paid close to $44 billion in tax refunds to some 19 million Canadians. That works out to an average refund of $2,295.
If you are one of those taxpayers, here are five ideas to consider for making the most of your refund.
Repay your most costly debts
Borrowing money for consumer purchases can end up costing a lot in interest and, unlike a student loan, mortgage or business start-up loan, consumer debt is not a lever for building assets. Unpaid credit card balances top the list of debts to avoid due to their often hefty interest rates. The first thing to do with your tax refund might be to pay down your costly debts, especially those you can’t deduct from your income (which is generally the case).Reinvest in your RRSP
One of the most profitable long-term strategies can be to immediately re-invest your tax refund in your registered retirement savings plan (RRSP), providing you have enough contribution room. As the following example illustrates, this reinvestment could generate a substantial amount of additional retirement capital thanks to compound returns over many years.
There’s also a related strategy that you might want to consider for next year. The approximate amount of the refund that an RRSP contribution would generate can actually be estimated using the marginal tax rate that applies to your income bracket. As we can see in the following diagram, a $10,000 contribution from a high-income taxpayer could result in a refund of about $5,000. (All amounts are for information purposes only; actual figures depend on the tax rates in your province.)
Knowing that, you could take out a very short-term loan in the amount of your anticipated refund and invest it in your RRSP in advance. When you receive your tax refund, simply use it to immediately repay the loan (and more, since this additional investment would also generate an additional refund).
Note that the same logic applies to the first home savings account (FHSA), providing you comply with its specific rules. To learn more about FHSAs, read this article.
Pay down your mortgage faster
Most mortgage contracts allow the payment of a lump sum each year to speed up the repayment of capital – which, over the long term, reduces the amount of interest paid. While mortgage rates have dropped in the past 12 months, they are still higher than a few years ago, and the current economic situation casts their future trajectory in an uncertain light. With this in mind, reducing your mortgage burden could be a wise choice.
Build up your emergency fund
Another sensible option would be to reinforce your short-term financial cushion. The general recommendation is to have enough quickly accessible savings to cover three months’ worth of living expenses or, alternatively, the equivalent of three months’ salary. The tax-free savings account (TFSA) is an appropriate vehicle for this purpose, since it shelters your savings from taxes and the funds can be withdrawn at any time. By investing each year’s tax refund in a TFSA, you could quite quickly build up this kind of emergency fund. Read this article to learn more about TFSAs.
Invest in your children’s education… or your own
If you have children, you could use your tax refund to contribute to a registered education savings plan (RESP) for their future postsecondary studies. Your contributions wouldn’t be deductible, but they would allow you to qualify for grants and would grow in a tax-sheltered environment. Otherwise, why not invest in your own professional future by taking a training course that would advance your career?
These are just some of the main ways to put a tax refund to good use. There are many others: maximize your TFSA or FHSA, enhance your insurance coverage, invest in your home or your home office…
Talk to your advisor about it, and together you can explore all the possibilities.
The following sources were used to prepare this article:
BNN Bloomberg, “Keep more of your dollars invested with these 4 tax perks.”
Desjardins, “6 RRSP tax advantages to discover”; “Pay off your mortgage faster”; “Emergency funds: Be prepared for the unexpected.”
Investment Executive, “Reinvesting tax refunds is a painless way to improve RRSP positions.”
MCap, “How Lump Sum Payments Can Help Pay Your Mortgage Faster.”
DFSI, “Do you have a good emergency fund?”; “Seven ideas for making the most of your income tax refund”; “Five strategies for using your income tax refund.”
Statistics Canada, “Time for taxes.”
