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.
We understandably look forward to receiving them, but tax refunds are not all positive. While it certainly feels good to receive a lump-sum deposit in your bank account, don’t let that hit of dopamine fool you: a tax refund is the result of overpaying the government. What it means is the Canada Revenue Agency (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.
How tax refunds work for employees
Employers collect tax on behalf of the government from your paycheque, before it even gets to your bank account. Employed individuals file an income tax return detailing their income, deductions, and 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 on which they haven’t yet paid any tax), then they must pay what they owe 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 one that pays a higher interest rate.
At the end of the fiscal year, the self-employed add up all their income, subtract expenses and deductions, determine their average tax rate, then subtract credits. Because no taxes have yet been collected, they must send the full amount to the CRA. Those who pay taxes annually like this rarely receive a refund.
It’s also possible for self-employed individuals to pay their taxes throughout the year in quarterly installments. There are several different ways to calculate these installments, but it’s unlikely it will add up to the exact amount owed in the end. Of course, if you overpay, you will get a refund.
Self-employed individuals generally have until April 30 to pay any taxes owed but until June 15 to actually file their return.
How to decrease your tax refund (aka avoid overpaying taxes throughout the year)
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 savings account
Let’s say you simply need more cash month to month — you have a high rent, debts to pay, your kid in day care, etc. You know you are going to contribute a large amount to your Registered Retirement Savings Plan (RRSP) and, therefore, end up with fewer 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 paycheque, 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 that amount away 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 interest on that money. However, this second strategy takes discipline not to spend what is essentially the CRA’s money.
If you are employed, it’s possible to get your employer to decrease the amount of tax collected from each paycheque by filling out a Form TD1.
How to increase your tax refund
It’s pretty easy to increase your tax refund: just pay more tax! You can fill out Form TD1 to get your employer to increase the amount of tax collected.
Otherwise, you will have to increase your refund by decreasing 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
Interest for a loan used to invest
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/territorial.
Some common tax credits include:
Basic personal exemption amount (around $15,000)
Canada Pension Plan contributions
Post-secondary school tuition
Add up all your credits and multiply by 15% (the federal nonrefundable tax credit rate) to figure out roughly how much to subtract from your tax payable.
You can use your nonrefundable 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 your credit amount 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. To do it, you will need five final numbers:
Income tax already paid
Total taxable income
Average tax rate
Total credits multiplied by 0.15
From that point, 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 get more in touch with your finances while you’re at it.
How long it takes to get your tax refund in Canada
The CRA typically sends your tax refund within two weeks if you’ve filed online or within eight weeks if you’ve filed 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.
To get your return as fast as possible, the CRA recommends signing up for direct deposit with your online bank.
If the CRA takes longer than a month to deliver your refund, they will pay you a compound daily interest, between 1% and 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 the amount is less than $2, you owe child support payments, or you owe the government any money (say, you have any outstanding student loans or a previous tax balance). If none of these scenarios apply to you and you still haven’t received your refund after eight weeks, contact the CRA.
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 filed your return by paper, you can mail in a completed Form T1-ADJ, T1 Adjustment Request along with all supporting documents.
Frequently Asked Questions
If the Canada Revenue Agency (CRA) owes you a tax refund, it will be sent to you automatically after you file taxes.
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.
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 receive the notice of assessment and tax refund within two weeks from the date of filing or within eight weeks 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. To get refunded faster, you can register for direct deposit.
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 two weeks if you file online or within eight weeks if you file by mail. If you live outside Canada, refunds can take up to 16 weeks. The 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 CRA" account, or talk to a CRA representative by calling 1-800-959-1956. Be ready to provide the following details:
- Your name and date of birth
- Social insurance number
- Line 150 from your 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 a 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 or is about to owe a balance or outstanding debt to the (federal, provincial, or territorial) government, or has 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.
No. Your annual tax refund is a one-time payment that will not be considered part of your income for the following tax year.
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