Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
Would you celebrate if you paid too much for a pair of jeans, found the error, and convinced the store manager to give you a refund? Or would you be upset that they put the wrong sticker on the item and took too much of your money to begin with?
Getting excited about a tax refund is pretty much the same thing.
Tax refunds, contrary to popular belief, are not all positive. While it certainly feels good to receive a lump sum deposit in your bank account, like you won the lottery, don’t let that hit of dopamine fool you. A tax refund is the result of overpaying the government. What it means is the CRA collected too much tax from you over the course of the year and is now refunding the excess. The bigger the refund the more interest, investment, and spending opportunities you lost out on throughout the year.
While experts often suggest Canadians should be saving 10 to 20% of their income, Canadians are only managing to stash away about 1.7%. It would be near impossible for the government to rely on a consistent revenue stream if they were chasing after everyone, trying to collect the exact amount payable. It’s far easier and more reliable to take the money at the source, from a paycheck, and then return any surplus.
Wealthsimple Tax is a simple way to file your taxes. File your return with confidence it’s done right, and pay what you want—there’s no catch.How tax refunds work for employees
Employers collect tax on behalf of the government at the source—from the paycheck before it even gets to your bank account. Employed individuals file an income tax return detailing their income, deductions, credits before April 30 of the following year to figure out the actual tax they owed. If they paid more than they owe, then the government refunds the money. If they underpaid (likely because they have investment or other sources of income) then they must pay up by April 30.
How tax refunds work for the self-employed
In contrast, self-employed individuals are responsible for their own cash flow throughout the year. Ideally, they should estimate their average tax rate at the beginning of the year, and transfer that percentage from each paid invoice to a separate bank account, preferably that pays a higher interest rate.
At the end of the fiscal year, the self-employed add up all their income, subtract expenses, deductions, determine their average tax rate and then subtract credits. Because no taxes have yet been collected, they must send the full amount to the CRA.
The self-employed require the time to do bookkeeping, plus the willpower not to spend the accumulated cash.
Those who pay taxes annually like this rarely receive a refund. The vigilance this approach requires usually results in the taxpayer paying the correct or nearly correct amount in taxes.
It’s also possible for this group to pay taxes throughout the year, in quarterly installments. There’s several different ways to calculate how much these installments are, but it’s unlikely it will add up to the exact amount owed. If you overpay, you will get a refund. This group generally has until April 30th to pay any taxes owed and until June 15th to actually file a return.
How to decrease your tax refund
If you are employed it’s possible to get your employer to decrease (or increase) the amount of tax collected from each pay cheque by filling out a Form TD1.
Decreasing your tax refund means that you will be paying less tax throughout the year. There are two reasons this may benefit you:
You need more cash flow throughout the year to live on
You want to invest your money throughout the year in a high-interest saving account.
Let’s say you simply need more cash month to month—you have a high rent, debts to pay or have your kid in daycare. You know you are going to contribute and deduct a large amount to your RRSP and therefore will end up with a lower income, less taxes payable, and a large refund. The government doesn’t know this in advance though—it’s collecting the tax based on your gross salary alone, without taking into account any deductions or credits. If you reduce the amount taken off each paycheck you could end up with a few hundred dollars (or more) each month to make it easier to pay your living expenses.
Or, let’s say you are a high earner and pay over $100,000 in taxes each year. You know that if you squirreled away that amount in a high interest savings account every month until April 30 of the following year, instead of handing it over preemptively to the government, you could earn at least 2.4% interest on that money. This strategy takes discipline not to spend, what is essentially, the Crown’s money.
How to make your tax refund bigger
It’s pretty easy to increase your tax refund. You can fill out Form TD1 to get your employer to increase the amount collected. Otherwise, you will have to decrease your taxable income through using deductions or by decreasing your tax payable through using credits.
Decrease your taxable income through maximising your deductions
Deductions are specific categories of spending that the government has chosen to incentivize. They encourage you to spend money on these categories by allowing you to deduct the expenses from your income.
Lowering your income effectively reduces both your average tax rate and your tax payable—and therefore usually increases your tax refund. Deductions cannot reduce your income below zero.
Common deductions are:
Child care expenses
Support payments for a spouse
Self-employment expenses
Interest for a loan used to invest
Union dues
Decrease your tax payable by maximising your credits
Whereas deductions reduce your income, credits reduce your tax payable. There are hundreds of boutique credits, both federal and provincial.
Some common tax credits include:
Basic personal exemption amount (around $13,000)
Disability credits
Medical credits
Charity donations
CPP contributions
Adoption expenses
Post-secondary school tuition
Add up all your credits and multiply by 0.15 to figure out roughly how much to subtract from your tax payable.
You can use your non-refundable tax credits to reduce your tax payable to zero—the CRA will not owe you money beyond that. But if you are eligible for refundable tax credits and the amount you owe in taxes is less than the total amount of credits, the CRA will dip into its own coffers to pay you. For instance, if you owe $1,000 in taxes but the amount of credits is $1,200, the CRA will pay you a refund of $200.
How to calculate your tax refund
The easiest way to calculate your tax refund is to use an online tax calculator or have an accountant do the sums for you.
You can also do a rough reckoning on paper, but depending on how complex your financial situation is it may take you some time.
You will need five final numbers:
Income tax already paid
Total taxable income
Total deductions
Average tax rate
Total credits multiplied by 0.15
The equation is:
Step 1: Total income - total deductions = taxable income
Step 2: taxable income x average tax rate = tax on taxable income
Step 3: tax on taxable income - (sum of all credits x 0.15) = tax payable
Step 4: tax payable - tax already paid + other refundable credits = refund
While it may look intimidating, you’ll get the hang of it fast, and probably get more in touch with your finances while you’re at it.
How long it takes to get tax back in Canada
The CRA typically sends your tax refund within two weeks when you file the income tax return online, or within eight weeks when you file a paper return. If you live outside of Canada returns may take up to 16 weeks. If your tax return is flagged for an in-depth review it may take longer.
The CRA recommends signing up for direct deposit with your online bank to get your return faster.
If the CRA takes longer than about a month to deliver your refund, they will pay you a compound daily interest, between 1and 5%. (No interest is given for the overpayment collected and held throughout the year.)
Why you might not have gotten your tax refund
You may not get a refund if it’s less than $2, if you owe child support payments, or if you owe the government any money (say, if you have any outstanding student loans or if you have a previous tax balance).
If none of these scenarios apply to you, then contact the CRA after 8 weeks.
Adjusting your tax refund
In order to adjust your tax refund you must adjust your income tax return. Once you receive your notice of assessment you can adjust different lines in your return. You can do this for the past 10 years of returns.
If you filed your return online, you can adjust certain lines of your return either through MyAccount, or through ReFile. If you file your return by paper you can mail in a completed Form T1-ADJ, T1 Adjustment Request and all supporting documents.
Frequently Asked Questions
If the CRA owes you a tax refund, it will be sent automatically to you after you file taxes. You can expect your tax refund to arrive 2 weeks after filing taxes if you file online, or 8 weeks later if you file by mail. If you are living outside Canada, your tax refund can take up to 16 weeks. The CRA may also select your tax refund for an in-depth review, which may delay receipt of your refund.
You can register for direct deposit to get tax refunds faster.
To calculate your tax refund, you need to find out how much tax you have already paid to the CRA, tax credits and tax deductions you are eligible for, your total taxable income, and the tax rates that apply to your income.
Using the following equations, you can calculate the refund:
Step 1: Total income - total deductions = taxable income
Step 2: taxable income x average tax rate = tax on taxable income
Step 3: tax on taxable income - (sum of all credits x 0.15) = tax payable
Step 4: tax payable - tax already paid + other refundable credits = refund
You can also use an income tax calculator to calculate your total taxes and tax refund.
If you file taxes online, you should be able to receive the notice of assessment (NOA) and the tax refund within 2 weeks from the date of filing taxes. If you file by mail, tax refunds can take up to 8 weeks, and if you live outside Canada, it can take up to 16 weeks.
If you have received the notice of assessment but haven’t received the tax refund, you should be able to receive the tax refund through a cheque or direct deposit within 2 weeks. You can contact Canadian Revenue Agency (CRA) after 2 weeks.
The CRA does not give you a tax refund if your refund is less than $2, you owe an amount (taxes or debt) to the (federal, provincial, or territorial) government, or if a wage garnishment law applies to you.
There are several ways through which you can reduce your taxable income and get a higher tax refund.
Union dues and employment expenses
Vehicle expenses for the self-employed: Self-employed individuals who use their automobile for business activities can claim vehicle-related expenses on their tax return such as fuel, repairs, maintenance, and insurance.
Tax credits: Tax credits directly reduce the amount of tax you owe.
If you haven’t received your tax refund, you need to check how many days have passed since you filed the tax return. Tax refunds arrive within 2 weeks if you file online, or take 8 weeks if you file by mail. Refunds can take up to 16 weeks if you live outside Canada. CRA can also select some tax returns for detailed checking, which can take much longer. To check the status of your tax refund log into your ‘My Payment’ account. Or talk to a CRA representative by calling 1-800-959-1956 with the following details:
Your name and date of birth
Address
Social Insurance Number
Line 150 from the most recent tax assessment
No, you cannot get a tax refund if you owe taxes to the (federal, provincial, or territorial) government or money such as debt (such as student loan missing payments or EI deductions), outstanding GST/HST returns from sole proprietor, or partner, or a wage garnishment order that garnishes your income.
Tax refunds are intercepted by the CRA if the taxpayer has an outstanding balance (owing government) or is about to owe a balance, outstanding debt to the (federal, provincial, or territorial) government, outstanding GST/HST returns from a sole proprietorship or partnership or has a garnishing order under the Family Orders and Agreements Enforcement Assistance Act.
The Canadian Revenue Agency (CRA) withholds the tax refund until you file taxes. Refunds are paid automatically after you file taxes. You cannot get a refund if you don’t file your tax return.
Your tax refund is part of your net earned income that was overpaid to the CRA during the tax year.
Last Updated April 18, 2022
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