Tax Refunds, RRSPs, and the Plan Most Canadians Don't Have

What to Do With Your Tax Refund (Before You Spend It)

Around 80% of Canadians get a tax refund every year. The average is somewhere near $2,000. And while it feels like a windfall when it hits your bank account, here's the reframe most people don't want to hear: a tax refund isn't a gift. It's a return of money you overpaid throughout the year.

Put another way — if your refund is $2,000, you essentially wired the CRA about $167 a month into a savings account that earned you 0% interest, and they sent it back to you the following April. It's an interest-free loan to the government. Worth asking whether that's really what you wanted to do with your money.

Why most refunds happen

The biggest driver is RRSP contributions. When you contribute to an RRSP, the amount lowers your taxable income. If you've been making monthly contributions all year while your employer (or your own corporation) was deducting tax based on your full salary, you've overpaid. The refund is the difference coming back.

Quick example: someone earning $100,000 in salary contributes $10,000 to their RRSP over the year. Their taxable income drops to $90,000. At roughly a 30% marginal tax rate, they'd see about a $3,000 refund show up in April.

Nothing wrong with the contribution. But there's a better way to handle the timing.

The fix most people don't know about

If you're making regular monthly RRSP contributions, you can file CRA form T1213 to request that your employer reduce the tax withheld at source. Instead of waiting a year for that $3,000 refund, you'd see roughly $250 more in your monthly take-home pay.

A few things to know:

• You have to file it annually (it doesn't roll over)
• You'll need documentation of your pre-authorized RRSP contributions
• Your accountant can help you put it together

The result: you stop the interest-free loan and put that money to work in real time — toward your TFSA, debt, your cash flow plan, or whatever the priority is.

If you do get a refund, have a plan before it lands

The worst outcome is getting a refund deposited into your chequing account and watching it quietly disappear into lifestyle spending. You don't even remember what you spent it on a month later.

A better approach: decide where it's going before it shows up. Some options worth considering:

• Reinvest it back into your RRSP (assuming you have room) — you'll lower next year's taxable income too
• Top up your TFSA, especially if you're a high earner whose spouse has a lower marginal rate
• Fund the RESP if you have kids
• Knock down high-interest debt
• Allocate it toward a specific goal in your cash flow plan — a vacation, a vehicle, a move, whatever's actually on the list

The point is intention. A refund spent on purpose is fine. A refund absorbed by your everyday account is the default that most people fall into.

A note on RRSPs and retirement

Worth addressing this one because it comes up constantly: a lot of retirees complain about the tax bill when they start drawing from their RRSP. They tell their kids RRSPs are bad. They forget that they got a refund — or at least a tax deferral — every year they were contributing.

The RRSP isn't the problem. The lack of a withdrawal plan is. If you contributed at a 30% marginal rate during your highest earning years and you're drawing in retirement at 20–25%, that's a win. The deferral worked. You just need a plan for how to pull money out tax-efficiently — which means thinking about it well before you retire, not the year you do.

Bottom line

If you're consistently getting a refund, you're consistently overpaying. Either fix the timing with a T1213, or have a plan for what the refund is doing the moment it arrives. Reactive decisions with three or four thousand dollars in April compound over a career — usually not in your favour.

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