Things to Know About Tax Refunds in Canada

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 positive. While it certainly feels good to receive a lump sum deposit in your bank account, like you won the lottery or something, don’t let that hit of dopamine fool you. A tax refund is the result of overpaying the government. The CRA collected too much tax from you 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, in reality 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 paycheque, and then return any surplus.

Easy, fast, and even fun. SimpleTax is CRA-certified tax software that you’ll actually want to use. And you only pay what you want, no catch — get started.

How tax refunds work

Refunds work differently for employees and the self-employed. Here's what you need to know.

How tax refunds work for employees

Employers collect tax on behalf of the government at the source—from the paycheque before it even gets to your bank account. Employed individuals file a 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 30th.

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.

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 30th 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. Two reasons this may benefit you are:

  1. You need more cash flow throughout the year to live on

  2. 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 pay cheque 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 a $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

Most Canadians prefer to increase their tax refund. This strategy is akin to using the CRA as a kind of piggy bank.

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 decrease your tax payable through using credits.

Decrease your taxable income through maximizing 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 increases your tax refund. Deductions cannot reduce your income below zero (in other words the government will only refund taxes paid, not give you money from its own coffers).

Common deductions are:

  • RRSP contributions

  • 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 maximizing your credits

Whereas deductions reduce your income, credits reduce your tax payable. There are hundreds of boutique credits, both federally and provincially.

Some common tax credits include:

  • Basic personal exemption amount (around $12,000)

  • 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 only use your credits to reduce your tax payable to zero—the CRA will never owe you money beyond that.

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:

  1. Income tax already paid

  2. Total taxable income

  3. Total deductions

  4. Average tax rate

  5. Total credits multiplied by 0.15

The equation is:

  1. Total income - Total deduction = Tax payable

  2. Tax payable x average tax rate = Tax owed

  3. Total tax owed - (sum of all credits x 0.15) = Total tax payable

  4. Total tax payable - tax already paid = refund

It’s basic elementary school math—adding, subtracting and percentages. 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 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 then about a month to deliver your refund then they will pay you a compound daily interest of between 2 and 6%. (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 (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 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 and all supporting documents.

Last Updated May 14, 2020

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