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Many companies in Canada tend to pay out bonuses around Christmas time. If one is fortunate enough to get one this year what is the best strategy for the bonus? TFSA's have a limit of $5000 yearly. An RRSP will defer taxes and sometimes result in a tax refund.

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If you have any non-mortgage debt – e.g. a credit card, a line of credit, a student loan, or a car loan – then I would pay that down first. The interest being paid on that kind of borrowed money likely exceeds what you could expect to earn in reasonable investments.

If you don't have any non-mortgage debt, and your mortgage is large (e.g. thinking about it keeps you up at night, sometimes :-) then go for the the extra mortgage payment. Also go for the mortgage if you're paying at a relatively high interest rate compared to what you could expect from investments.

If your mortgage is small (e.g. it's going to be paid off in a few years) and at a relatively low interest rate, then I would choose the RRSP or TFSA. Unless you're in the top income tax bracket, I would favor the TFSA over RRSP – TFSAs were only introduced this year and any balance there already is likely tiny compared to the RRSP. For retirement, I'm aiming to have equal amounts of RRSP and TFSA money.

One option you haven't mentioned is an RESP. If you have children under the age of 18, your bonus could also be used to make next year's RESP contribution and qualify for the 20% matching Canada Education Savings Grant (CESG) from the government.

  • 2
    Don't forget about an emergency fund. – DJClayworth Mar 10 '11 at 22:14
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Can you wait until you retire before needing the money? Will you buy your first house sometime in the future? If yes, then favour an RRSP. Remember that you are rewarded by paying less tax for having the foresight and commitment to defer income taxes until your retirement, when you are presumably earning less income.

Are your household expenses higher than 28% of your gross income? 35% of your net income? Does making your mortgage payments stress you? Are interest rates lower than their historical norm and an increase would cause you difficulty? If yes, then favour your mortgage.

Do you need this money before your retire? Does your TFSA earn more interest than your mortgage costs your? If yes, then favour a TFSA. Does an alternative investment earn more than your TFSA? Can you handle an uptick in your mortgage interest rate? If yes, then favour the alternative investment and not your RRSP, mortgage or TFSA.

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