Splurge vs. save? TD shares tips to help Canadians get the most out of their tax returns

TORONTO, April 11, 2013 /CNW/ - With the tax return deadline approaching on April 30, some Canadians may already be happily receiving refunds, while others are disappointed because they have to pay. Regardless of your situation, there are investing decisions that you can make to help reduce the overall amount of tax you have to pay.

For many Canadians, tax season means a lump sum of money: according to the Canada Revenue Agency, the average refund in 2011 was $1,580. The amount of tax paid annually by Canadians depends on several factors, including income, place of residence and deductions.

"Many Canadians think of a tax refund as a bonus, even though it's your own money to begin with," says Cynthia Caskey, Vice President, Sales Manager & Portfolio Manager, TD Wealth Private Investment Advice. "It can be tempting to splurge on luxury items, but many Canadians need to balance paying debt, saving for a child's education, and for retirement. It's important to consider these needs when deciding how best to spend your refund."

For Canadians who are eager to spend their refunds, Caskey offers the following suggestions:

1. Pay down high-interest debt: This can include outstanding credit card balances, and should be your top priority.  Consider making a lump-sum payment, especially if the interest on the debt is not tax deductible.
   
   
2. Save for a child's education: You can contribute to a child's Registered Education Savings Plan (RESP), which will also potentially qualify them for a Canada Education Savings Grant (CESG).  The plan will earn tax-free investment income on both your contribution and any government grants. Grandparents may consider opening a family RESP plan, which can have multiple children as beneficiaries.
   
   
3. Create a flexible savings strategy: A contribution to a Tax-Free Savings Account (TFSA) can be part of your retirement savings strategy, and interest earned and investment income is not taxed. Because you can withdraw the funds at any time, it is a great option for use as an emergency fund. A good rule of thumb is to have at least six months of living expenses set aside for contingencies.

If you're hoping to reduce your taxes owed next year, Caskey offers the following tips:

1. Take a year-round approach to tax savings: Reviewing your asset allocation with your advisor throughout the year may help ensure your investments are allocated to maximize tax efficiency. Consider contributing to your RSP regularly throughout the year, instead of making a lump-sum contribution, to take advantage of compound interest.
   
   
2. Invest efficiently outside RSPs/TFSAs: With your advisor, determine an appropriate asset mix and consider investment solutions based on their tax efficiency. For example, Return of Capital distributions may be received tax-free, but they reduce the adjusted cost base of the investment. Also keep in mind that capital gains are taxed at half the rate of interest income.
   
   
3. Plan not to get a tax refund in the first place: If you are getting a large tax refund, that means you are overpaying! Consider making regular contributions to your RSP or speak with your advisor about strategies to ensure you're being tax efficient.

"It's important to make tax-smart investment decisions appropriate to your circumstances. There are several steps you can take to help get a refund at tax time," adds Caskey. "You should carefully examine your 2012 tax return, income and investments, and start planning now for improvements in the future. A little planning can go a long way, not just for next year, but for years to come."

About TD Wealth Private Investment Advice

TD Wealth Private Investment Advice is a division of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank. TD Waterhouse Canada Inc. - Member of the Canadian Investor Protection Fund.

About TD Bank Group

The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group (TD). TD is the sixth largest bank in North America by branches and serves approximately 22 million customers in four key businesses operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking, including TD Canada Trust and TD Auto Finance Canada; Wealth and Insurance, an investment in TD Ameritrade, and TD Insurance; U.S. Personal and Commercial Banking, including TD Bank, America's Most Convenient Bank, and TD Auto Finance U.S.; and Wholesale Banking, including TD Securities. TD also ranks among the world's leading online financial services firms, with more than 9 million online customers. TD had CDN$818 billion in assets on January 31, 2013. The Toronto-Dominion Bank trades under the symbol "TD" on the Toronto and New York Stock Exchanges.

SOURCE: TD Bank Group