How to Maximize Your Tax Credit and Make It Last.
For most Canadians, a tax refund provides relief from the challenge of managing monthly payments on a fixed income. It’s something to look forward to. However, once it lands in your bank account, it often seems to vanish quickly—like water on a hot pan. Poof! A few tanks of gas, a couple of grocery runs, a tire replacement, an installment on property taxes, and overdue credit card payments, and suddenly it feels like the tax refund never existed. This year, many are feeling the pinch even more, as monthly expenses that once seemed manageable have increased.
Is there a way to make your tax credit work for you—not just in the moment but for the long term? The short answer is yes! Here are nine smart ways to do that:
1. Pay Down Your Consumer Debt: Credit cards can be useful for managing spending and earning benefits like air miles and cash back. However, if you carry a balance or only make minimum payments, the interest charges (with APRs averaging 21%) can accumulate quickly. By paying down your credit card debt, you reduce the amount of interest over time while also improving your debt-to-income ratio and credit score. If you don’t have credit card debt, consider using your refund to pay down other loans, such as car, student, or personal loans.
2. Make a Prepayment on Your Mortgage: If you have an open mortgage, you can make prepayments or pay extra without facing penalties. Prepaying your mortgage can be a smart way to use your tax refund, as it goes directly toward your loan principal.
3. Contribute to Your RRSP: The Canada Revenue Agency (CRA) uses your taxable income to determine how much federal and provincial/territorial income tax you owe, depending on your tax bracket. Contributing to a Registered Retirement Savings Plan (RRSP) helps build your retirement savings while also reducing your taxable income.
4. Start an Emergency Fund: A general rule of thumb is to have three to six months’ worth of living expenses saved in an emergency fund. You might consider holding a guaranteed investment certificate (GIC) as part of this fund, and it’s wise to choose a cashable or redeemable GIC to allow easy access to your money without penalties. Consult your accountant for more information on setting this up efficiently.
5. Open a Tax-Free Savings Account (TFSA): A TFSA is a registered savings and investment plan for individuals aged 18 and older. Unlike an RRSP, contributions to a TFSA are not tax-deductible, but all deposits and earned income (like capital gains or investment income) are tax-free, even when withdrawn.
6. Save for Your Child’s Post-Secondary Education: A Registered Education Savings Plan (RESP) allows parents and other eligible individuals to save for a child’s education. A significant benefit of an RESP, besides tax-free growth, is the Canada Education Savings Grant (CESG), which matches a percentage of contributions up to a lifetime maximum of $7,200.
7. Build Your Investments: If your refund is substantial, consider investing it in Halal ETFs or other Halal investment products. Reach out to friends for recommendations on reputable Halal financial advisors who can guide you in making informed decisions to help achieve your financial goals and make the most of your tax refund.
8. Donate to Charitable Organizations: Donating to your preferred Muslim charity, which is credible, trustworthy, and has a documented track record of helping the ummah, like helping our displaced sisters and brothers in Gaza or Burma, can earn you an official donation receipt for tax credits. You can receive a 15% non-refundable federal tax credit on the first $200 donated and 29% on donations over $200. Donation amounts can be carried forward, and spouses or common-law partners can combine their donations, allowing the individual with the higher income to claim the tax credit. However, the maximum donation credit you can claim is limited to 75% of your net income for the year.
9. Invest in Yourself: This year’s buzzword is “upskilling.” You know your strengths; consider expanding your knowledge by enrolling in a class to improve your skills or starting a side gig to boost your income over time. You may also find tax credits available to assist with tuition and other costs, such as the Canada Training Credit, which is refundable and can help offset these expenses.
By considering these strategies, you can make your tax refund work harder for you and help secure your financial future, Insha’Allah.
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