For many Canadians, tax season means a lump sum of money. In fact, the Canada Revenue Agency (CRA) finds the average refund in 2011 was $1,580.

Read: Many Canadians file their own tax returns

“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,” says Cynthia Caskey, vice president, sales manager & portfolio manager, TD Wealth Private Investment Advice. “Consider these needs when deciding how best to spend your refund.”

Read: Tax-efficient investing, part 1

For clients who are eager to spend their refunds, Caskey offers the following tips:

  1. Pay down high-interest debt: This includes outstanding credit card balances. 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 RESP, which will also potentially qualify them for a Canada Education Savings Grant. The plan will earn tax-free investment income on 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 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 as an emergency fund. Have at least six months of living expenses set aside for contingencies.

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And here are some tips so clients get more on their tax returns next year:

  1. Take a year-round approach: Reviewing asset allocation throughout the year may help ensure investments are allocated to maximize tax efficiency. Consider contributing to your RRSP regularly, instead of making a lump-sum contribution so you can take advantage of compound interest.
  2. Invest efficiently outside RRSPs/TFSAs: Determine an appropriate asset mix and consider investment solutions based on 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 capital gains are taxed at half the rate of interest income.