The sooner you file your taxes, the faster you can put your refund to work in capitalizing on a number of opportunities offered up by financial market events in early 2018.
The Canada Revenue Agency reports that the average refund for tax returns filed between mid-February, 2017, and late January was $1,750 for amounts paid by direct deposit and $1,795 for refunds paid by cheque. Over all, 57.5 per cent of tax filers got a refund last year, while 22.4 per cent had a balance owing and 19.9 per cent had neither a refund or balance owing (percentages are rounded).
Let's put aside the argument that a refund means you're over-paying your taxes through the year and thereby floating the government an interest-free loan. Lots of people are getting refunds and the amounts they're receiving are large enough to do something meaningful.
1. Pay down debt
High debt levels have been in the news a lot lately, partly because people continue to borrow more despite repeated warnings about debt overload. Credit-card interest rates are typically set around 20 per cent these days, which simplifies your decision-making if you have a card balance and a tax refund. Pay down what you owe on your card, as soon as your refund arrives.
Another reason for the attention paid lately to debt levels is that interest rates have increased significantly since last summer and could rise a bit more this year. If you owe money on a line of credit balance you haven't chipped away at, using your tax refund to reduce the balance owing makes a lot of sense.
The Bank of Canada says almost half of mortgages will renew this year, very likely at rates that are higher than when the loan was set up or last renewed. One way to reduce the impact of higher rates is to pay down your mortgage balance with your tax refund. Most mortgages allow at least modest paydowns with no penalty.
Recent home buyers get the most benefit from a mortgage prepayment. Reduce the principal early on and you rack up lower interest costs through the life of the mortgage.
2. Consider buying greenbacks
Planning a U.S. vacation this summer? Our dollar has been in decline for a few months now as a result of factors that may not resolve themselves any time soon. There are worries about Canada-U.S. trade and the fact that economic growth is tapering down while the United States looks stronger.
Rates may rise more in the United States, and that's negative for our currency.
The dollar has fallen from a 12-month high of 82.45 US cents to around 77 US cents lately. Using your tax refund to buy U.S. dollars now could save you money if the currency continues to slide.
3. Look for stock bargains
Canadian stocks are down as well this year, which presents another opportunity for your tax refund. You could buy a diversified exchange-traded fund or mutual fund to cover our market, or check out individual stocks that have gone on sale lately.
Among the biggest year-to-date losers are blue-chip dividend stocks such as Emera Inc., Rogers Communications Inc., Canadian National Railway Co., Fortis Inc. and BCE Inc. Dividend yields for this group range from 1.9 per cent for CN to 5.5 per cent for Emera. Enbridge Inc., a long-time dividend growth star that has fallen way out of favour, yields 6.7 per cent after a price decline around 18 per cent this year.
4. Build up emergency funds
Rising interest rates have just marginally nudged up the return on savings accounts, but there are now several options paying an inflation-beating 2 per cent or more.
If you don't have an emergency fund of at least several hundred dollars, then your tax refund offers a way to fix that by putting money in a high-rate savings account.
The Canadian High Rate Savings Bank Accounts website (highinterestsavings.ca) shows a rate of 2.5 per cent at Ideal Financial (a promotional rate until Dec. 31), 2.3 per cent at EQ Bank, 2.1 per cent at Hubert Financial, 2.05 per cent at Alterna Bank and AcceleRate Financial and 2 per cent at several places.
In a world of modest pay increases, your tax return might just be the biggest financial windfall you get all year. Don't miss the opportunity to put that money to work by capitalizing on the financial trends of early 2018.
Rob Carrick