If you haven’t checked your bank account recently, you might want to check it now. The Canada Revenue Agency just finished paying its quarterly GST/HST rebates for January. The GST/HST rebate is a refund you get if your income falls below a certain threshold. Currently, anybody earning less than $52,255 gets the cheque. Even if your salary is above that amount, you may still be getting the rebates, as large RRSP contributions and other deductions can push your income below the cutoff line.
If you’re lucky enough to have received a GST/HST rebate, you might be wondering what to do with it. These cheques are typically only a little over $100, so they do not represent a life changing sum of money. Still, it’s new money in your account – you might as well make the most of it. In this article, I will explore two things you could do with your GST/HST cheque if you’ve received one.
Option #1: Make an RRSP contribution
One obvious thing to do with a newly earned GST/HST cheque is make an RRSP contribution. Contributing to an RRSP gives you a double whammy of tax benefits. First, the contribution gives you a tax deduction for the tax year in which you make it, which can result in generous tax savings. Second, the account lets you compound investments tax-free for the duration of time they are within the RRSP. RRSP holdings do become taxable when you go to withdraw your money, but if you wait until retirement before withdrawing, you’ll likely be in a lower tax bracket than the one you’re in now.
Option #2: Invest the money in a TFSA
Another option for spending your GST/HST cheque is to put it into a TFSA and invest it. TFSAs are tax sheltered accounts like RRSPs, only the rules are slightly different. A TFSA gives you no tax break on contributions, but it does let you withdraw your money tax-free. It also lets you compound investments tax-free while your money remains in the account, just like an RRSP does. If you don’t want to do complicated tax planning and budgeting, you are better off investing in a TFSA than an RRSP. Before you contribute money to an RRSP, you need to be really sure that you won’t need it before retirement, because if you withdraw the money while you’re still working, you’ll end up paying steep taxes on it.
Investments worth making
Since both of my recommendations in this article involve investing, it makes sense to review some suitable investments for RRSPs and TFSAs.
In general, it pays to hold dividend and interest producing investments in RRSPs and TFSAs, because such investments generate taxable cash flows every year. If you hold a non-dividend stock and never plan on selling it, instead using it as collateral to borrow against, you don’t need to hold it in a tax sheltered environment.
For an example of an RRSP/TFSA-worthy dividend stock, consider Fortis Inc (TSX:FTS). Fortis is a Newfoundland-based utility that owns power companies across Canada, the U.S., and the Caribbean. Its shares have a 4.26% yield. If you have a maxed out $95,000 TFSA invested in FTS stock, you will get $4,047 in dividends from the position each year. Because you hold the stock in a TFSA, you will not pay any taxes on it.
It would be quite a different story if you held the stock outside of a registered account. If you held Fortis in a non-registered account (i.e., an account that is neither a TFSA nor an RRSP nor a related account), all $4,047 worth of dividends would be taxable. You’d get a $837 tax credit on that amount, granted, but you’d still have to pay some taxes. In a TFSA, you’d pay no taxes on the dividends, nor on any capital gains you realized, plus you’d be able to withdraw the sales proceeds tax-free. Talk about a win.
