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BDO Sault Ste. Marie

747 Queen Street East
P.O. Box 1109
Sault Ste. Marie, Ontario
P6A 5N7
(705) 945-0990

Helpful ways to maximize your tax refund and minimize your debt

Sault Ste. Marie residents are starting to receive their 2014 income tax refunds and are wondering what to do with the money; invest in a Registered Retirement Savings Plan (RRSP) or pay down debt? Income tax refunds are often the only lump sum monies received during the year and can make a big difference in your finances.  The temptation may be to use the money to buy the latest electronics, take a vacation or make a down payment for a larger purchase like a new car, trailer or recreational vehicle.

With Canadians almost $1.8 trillion in debt – taking on additional debt can be risky.  Why not consider using your income tax refund to reduce your debt?  You can take advantage of low interest rates, consolidate debt into one payment and apply more money to the principal. This strategy may help you to avoid taking unnecessary action to solve your financial difficulties.

Here are some alternatives to use your income tax refund effectively:

1.  Organize your debts, listing them by the amount owed and the interest rate being charged.  Credit card companies are required to post a notice on the monthly statement indicating the interest rates being charged, as well as the length of time it would take to repay the debt if only minimum payments are being made every month.

You can reduce debt by using your tax refund to repay the highest interest rate debt first. This will shorten the repayment period and free up the money used to pay this debt. The new found cash can then be used to reduce other debts. Paying off higher interest rate debt first increases the amount of your payments going toward the principal owed, rather than interest. This can help you pay down debt in less time.

2.  Contribute to your Registered Retirement Savings Plan (RRSP), if your debts are under control, to increase the amount of your 2015 income tax refund and help increase your retirement savings. Consider making monthly contributions to your RRSP to further maximize your retirement savings. Monthly payments are easier to manage and can easily be worked into your budget plan.

3.  Reduce your line of credit (LOC), if your credit card debt is under control by applying your refund to it. Then, permanently reduce the LOC and avoid it creeping up over the year, ask your bank to lower the limit once you have it at a manageable amount. The result will be a reduction in debt levels, especially while interest rates are at an all time low, and reduce your exposure to the risks associated with an increase in interest rates. The benefit is your ability to increase payments on remaining debts.

4.  A Consumer Proposal can help you if your debts are unmanageable. Your refund could be used as a lump sum payment to your creditors. Payments made through a consumer proposal may have some flexibility; a lump sum payment or a combination of a lump sum payment coupled with manageable monthly payments can also be used to settle your debts. By applying your 2014 tax refund to the proposal, creditors will see you are making an effort to use all resources available to you to pay down debt.

When evaluating alternatives, consider the return on investment of each before making an RRSP or Tax Free Savings Account (TFSA) contribution compared to the interest rate charged on the debt you are carrying.  Quite often the interest rates charged on debts are significantly higher than returns earned on RRSPs or TFSAs making debt reduction a much better “investment”.

Meeting with a Trustee in Bankruptcy is advised if you find your debt level is not going down year after year, even though you are making all your payments.  S/he can assess your financial  situation and explain all of your options so you can develop a plan to pay down debt.

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