Savers: 3 Smart Moves to Make With Your Income Tax Refund

Do something smart with your tax refund this year, like investing in stocks. Extendicare Inc. (TSX:EXE) and Dream Global REIT (TSX:DRG.UN) are two good places to start.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If it weren’t for getting a refund each year, I’m convinced large swaths of Canadians wouldn’t even bother submitting their income taxes. It’s not a pleasant experience.

Many folks use their refund as a way to treat themselves. They do their taxes, get some money back, and then immediately go and blow their newfound cash on a new TV, laptop, or exotic vacation. Easy come, easy go.

There’s nothing wrong with that, assuming you’ve got the rest of your financial house in order. But let’s face it. The people who immediately spend their income tax refund on something frivolous aren’t usually making smart decisions with their money.

It’s time to buck that trend. Here are three smart ways anyone can put their tax refund to work.

Pay down debt

This should go without saying, but I still regularly encounter people who are paying 10%, 15%, even as high as 24% on their debt.

This is a guaranteed way to make anyone poorer.

It can still be a prudent move to pay down so-called good debt. Let’s say you’re sitting on some student loan debt that costs 5% a year. Stocks have traditionally returned about 8-10% a year, including dividends. So it makes sense to invest for the long term rather than paying off debt.

That’s a valid argument, but I like looking at it this way: stocks should return more than debt. It’s a riskier asset class. We’ve got to compare apples to apples.

Canada’s largest bond ETF, iShares DEX Universe Bond Index Fund (TSX:XBB), is a reasonable fixed-income proxy. Even after selling off of late, it only yields 2.8%. This is the proper comparison when looking to pay down debt.

If I were sitting on debt that cost me 5%, I’d use my tax refund to pay down at least some of it.

Invest for retirement

There’s one simple reason why I encourage most investors to put money in their RRSP rather than a TFSA. RRSPs come with a nice tax advantage. You reduce your taxable income every time you put money in an RRSP.

If you’re in the 26% tax bracket, $3,000 put into an RRSP translates into $780 in tax savings. It’s a guaranteed 26% return! If that tax refund gets reinvested into next year’s RRSP, it creates a compounding effect.

The only thing left to do is decide how to invest that capital. If you’re a young person looking for long-term growth, a great choice is Extendicare Inc. (TSX:EXE), which is one of Canada’s largest owners and operators of assisted-care facilities. It is also a dominant player in Canada’s home healthcare market.

Not only is Extendicare poised to profit from the long-term trend of an aging population, but it also trades at a reasonable valuation. And, best of all, it pays a generous 4.6% dividend.

Start a passive-income empire

The average income tax refund is only a few thousand dollars. That doesn’t seem like much, but it is enough to at least get started building a passive-income empire.

Let’s say you invested $3,000 into Dream Global REIT (TSX:DRG.UN), the owner of 181 office towers in Germany and Austria, which collectively span 12.6 million square feet worth of space. The trust pays an 8.3% dividend, which is covered by cash flow — albeit barely. Income should go up as it passes on rent increases to existing tenants when their leases expire.

That $3,000 could buy you 313 shares based on today’s price. These shares each pay a monthly dividend of 6.66 cents. That works out to an extra $20.84 per month. Do it each year for a decade (assuming nothing else changes), and you’ve increased your income by $2,500 per year.

The bottom line

Too many people treat their income tax refund as found money, which is a silly attitude to have. That’s your cash. You gave it to the government to use, and now they’re giving it back. Make 2017 the year you finally start making smart moves with that unexpected windfall. Your future self will thank you.

Should you invest $1,000 in Extendicare right now?

Before you buy stock in Extendicare, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Extendicare wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of EXTENDICARE INC. Extendicare Inc. is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

An investor uses a tablet
Dividend Stocks

This Could Be the Top Canadian Dividend Stock to Buy Right Now

Here's why I think Enbridge (TSX:ENB) remains a top option for dividend investors in this current macroeconomic climate.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

How I’d Invest My $7,000 TFSA Across These 3 Canadian Stocks for Dividend Income

Investors looking for Canadian stocks for dividend income that can last decades should consider buying these three stocks today.

Read more »

A worker uses a double monitor computer screen in an office.
Dividend Stocks

National Bank vs. Bank of Montreal: How I’d Divide $12,000 Between Banking Stocks

Here's how I would think about splitting up a $12,000 prospective investment in National Bank of Canada (TSX:NA) and Bank…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

Canadian National Railway: How I’d Approach This Blue-Chip With $10,000 in 2025

Despite current macro headwinds, Canadian National Railway remains a rock solid, blue-chip pick for long-term investing.

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

April Income Strategy: Where to Invest $10,000 in Big Dividend Stocks

These stocks offer attractive yields for income investors.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How I’d Invest $50,000 in TFSA Cash for 2025

Looking to get started with a TFSA? Here's exactly how to get going with these top stocks.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Here’s the Maximum Amount Canadians Could Have in a TFSA

Just because you hit the max of your TFSA doesn't mean that's what it's worth. Here's how to make even…

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

This Canadian stock is like buying a whole whack of them in one click and makes the perfect long-term hold.

Read more »