Canada Tax Refund: All You Need to Know

Navigating the Canadian tax refund process can feel like embarking on a journey through the great, expansive wilderness—exciting yet slightly overwhelming. But fear not!

We’re here to guide you through the thickets and clearings of tax season, turning complex jargon into understandable insights. With our guide, claiming your tax refund in Canada becomes as serene as a calm lake at dawn, with just a hint of humor to keep spirits high.

Let’s dive in!

[lwptoc]

What Is A Tax Refund?

A tax refund is issued when the Canada Revenue Agency (CRA) collects more income tax than was rightfully due.

Some examples of why this might occur:

Your employer deducted more than they should have from your paychecks.
You overpaid when making your quarterly tax payments as a self-employed individual.
You should have claimed a tax deduction or credit you were eligible for.

Who Receives A Tax Refund

Anyone who overpays their taxes may be eligible for a tax refund.

Whether your employer deducted more than they should have from your paychecks or you overpaid when making your quarterly instalment payments as a self-employed individual, you are entitled to get money back.

When To Expect Your Refund

According to the CRA website, as long as you filed your return by the deadline, it aims to send you your refund within two weeks if you filed online or up to eight weeks if you filed a paper tax return.

However, it can take as long as 16 weeks if you live outside the country.

You can receive a tax refund as a paper check, but the CRA notes that the fastest way to get your refund is by signing up for direct deposit.

You can check your refund status by phoning the CRA or accessing your CRA My Account online. The CRA also posts standard processing times on its site.

Who Should File A Tax Return In Canada?

You’re required to file a tax return in Canada if any of the following situations apply to you:

You have income taxes owing.
You received a request to file a tax return from the CRA.
You and your spouse or common-law partner choose to split pension income.
You receive the working income tax benefit advance payments.
You disposed of any capital property (e.g., real estate) or have a taxable capital gain (e.g., mutual funds).
You’re required to repay employment insurance or old age security benefits.
You must fully repay amounts borrowed from your registered retirement savings plan (RRSP) for the Home Buyers’ Plan or Lifelong Learning Plan.
You’ve made contributions to the Canada Pension Plan (CPP).
You’re self-employed and paid premiums for employment insurance and other eligible earnings.
You’re a non-resident in receipt of certain types of Canadian source income.

Even if none of the above apply to you, you should file your tax return if:

You’d like to receive a tax refund.
You’d like to claim the working income tax benefit.
You’d like to receive the GST/HST credit.
You and your spouse or common-law partner want to start or continue to receive the Canada child benefit payments.
You have a non-capital loss you’d like to apply to other years to reduce your payable taxes.
You’d like to transfer or carry forward any unused portion of your tuition amount.
You’d like to report income that you could contribute to your RRSP to keep your RRSP deduction limit up to date for future years.
You’d like to carry forward any unused portion of the investment tax credit on expenditures you incurred in the current year.
You want to renew your guaranteed income supplement or allowance benefits under old age security.

If you’re a Canadian living abroad, you can sometimes continue to file your Canadian tax return, even if you aren’t required.

The CRA uses these three primary factors in determining your tax residence: dwelling place, spouse or common-law partner, and dependents.

If you need clarification on whether you should file your tax return, it’s best to speak with an international tax expert.

Pro Tip: Start a file folder for tax records and receipts that you can organise as they come in. This will make your life a lot easier come tax time.

How To Determine Your Tax Refund?

When you fill out your tax return, the final step is subtracting your total credits (line 48200) from your total payable amount (line 43500).

If the resulting number is negative, enter it on line 48400 of your return, and you will get a tax refund in that amount.

If the number is positive, you have a balance owing that you must pay by the deadline and will instead enter the amount on line 48500.

Factors that affect your tax refund amount

You can only be refunded what you overpaid in taxes, so overpayments are the main reason people get refunds.

Of course, any allowable tax deductions or credits you claim will also reduce the amount of tax you owe and could, therefore, boost the size of your refund.

Deductions may be RRSP contributions or childcare expenses, and you can use tax credits for tuition fees or charitable donations.

Another factor affecting the amount you are refunded is whether the CRA adds interest to the balance it owes you.

Compound daily interest will be calculated on one of the following dates: May 30 of the tax year, on the 30th day after you file your return or the day after you made an overpayment on your taxes, whichever is the latest.

Be aware that, even if you are due a refund, the CRA may keep a chunk of your refund if you owe taxes from a previous year, GST or HST, or any outstanding government debts like student loans.

The CRA will not process the refund if you are owed $2 or less.

How Do Tax Refunds Work For Employees?

Employers collect tax on behalf of the government from your pay cheque 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 determine the actual tax they owe.

If they pay more than they owe, the government refunds the money.

If they are underpaid (likely because they have investments or other sources of income on which they have yet to pay any tax), 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 yearly cash flow.

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 with 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, and then subtract credits.

Because no taxes have been collected, they must send the total 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 instalments.

There are several ways to calculate these instalments, but they will unlikely add up to the amount owed. 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 file their return.

What Documentation Do You Need To File A Tax Return?

To help make the tax filing process more manageable, here’s a list of materials that you should gather before filing:

Tax Slips

T4 slips for employment income
Interest, dividends, mutual funds (T3, T5, T5008)
Employment insurance benefits (T4E)
Universal Child Care Benefit (RC62)
Tuition/education receipts (T2202A)
Old Age Security and CPP benefits (T4A-OAS, T4AP)
Other pensions and annuities (T4A)
Social assistance payments (T5007)
Workers’ compensation benefits (T5007)

Tax Receipts

RRSP contribution receipts
Medical expenses
Professional or union dues
Support for a child, spouse or common-law partner
Charitable donations
Political contributions
Child care expenses
Moving expenses
Interest paid on student loans
Carrying charges and interest expenses
Home office expenses
Exams for professional certification

What Are The Different Tax Forms In Canada?

Here are some primary, common tax forms you should know when filing your tax return.

T1 General Tax Form: The T1 tax form is used to complete your income tax return.

It has five sections: identification, total income, net income, taxable income and refund/balance owing.

Schedule 1 – Federal Tax: The Schedule 1 tax form calculates your net federal tax.

You can also claim your federal nonrefundable tax credits and any federal tax you must pay on your taxable income.

Schedule 3 – Capital Gains (or Losses): Schedule 3 calculates the amount of taxable capital on your tax return. It has eight different sections to complete.

Schedule 7 – RRSP and PRPP Unused Contributions, Transfers, and HBP and LLP Activities: Schedule 7 reports any RRSP contributions you made during the year.

You’ll also use Schedule 7 to deduct your total RRSP contributions.

Schedule 9 – Donations and Gifts: Schedule 9 calculates any donations and gifts you made throughout the tax year.

Provincial Tax Forms: The provincial tax forms you’ll complete depend on the province where you reside.

For example, in Ontario, you’re required to complete ON428, ON-BEN and ON479. ON428 calculates how much tax is payable to the province;

ON-BEN is an application to the Ontario Trillium Benefit and Ontario Senior Homeowners Property Tax Grant, and ON479 is used to claim any tax credits that you’re eligible for.

How To Decrease Your Tax Refund?

Decreasing your tax refund means you will pay less tax throughout the year. There are two reasons this may benefit you:

It would help if you had 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 need more cash monthly — you have a high rent, debts to pay, your kid in daycare, etc.

You know you will contribute significantly to your Registered Retirement Savings Plan (RRSP) and 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 considering 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, if you squirrelled 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 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 tax collected from each pay cheque by filling out a Form TD1.

How To Increase Your Tax Refund?

Increasing your tax refund is pretty straightforward: pay more tax!

You can complete Form TD1 to get your employer to increase the tax collected.

Otherwise, you will have to increase your refund by decreasing your taxable income through deductions or by decreasing your tax payable through credits.

Decrease Your Taxable Income Through Maximizing Your Deductions

Deductions are specific categories of spending that the government has chosen to incentivise.

They encourage you to spend money on these categories by allowing you to deduct the expenses from your income.

Lowering your income effectively reduces your average tax rate and your tax payable, which usually increases your tax refund. Deductions must keep your income below zero.

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 federal and provincial/territorial.

Some common tax credits include:

Basic personal exemption amount (around $15,000)
Disability credits
Medical credits
Canada Pension Plan contributions
Adoption expenses
Post-secondary school tuition

Add up all your credits and multiply by 15% (the federal nonrefundable tax credit rate) to determine 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 credits, the CRA will dip into its 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 your financial situation, it may take some time.

To do it, you will need five final numbers:

Income tax already paid
Total taxable income
Total deductions
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 Does It Take 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 Canada, returns may take up to 16 weeks. It may take longer if your tax return is flagged for an in-depth review.

The CRA recommends signing up for direct deposit with your online bank to get your return as fast as possible.

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 need to receive your refund after eight weeks, contact the CRA.

Adjusting Your Tax Refund

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 through MyAccount or ReFile.

If you filed your return by paper, you can mail a completed Form T1-ADJ, T1 Adjustment Request, and all supporting documents.

How Can You Make The Most Of Your Tax Refund?

You’ve done the math, and you’re getting a refund.

Congrats!

But before you start planning a shopping spree, consider these innovative ways to put your refund to good use:

Crush your debt: Do student loans or credit card debt? Your tax refund can help you take a bite out of it.
Create a safety net: Life is full of surprises—and not all are fun. Setting aside some refunds for emergencies can give you peace of mind.
Jumpstart your RRSP: Your future self will thank you! Contributing to an RRSP can reduce your taxable income for the next tax year.
Invest in learning: Investing in yourself is always a good idea, whether it’s a coding boot camp or a cooking class.
Save for a down payment: Dreaming of your place? Your tax refund can help you reach your down-payment goals faster.
From understanding the basics: To making the most of your refund, you’re now equipped with the knowledge to navigate tax season like a pro.

What Are The Key Terms You Need To Remember?

Here’s a list of key terms to be familiar with to understand the tax filing process.

Tax Slip: A tax slip is prepared by your employer, payer or administrator. You should receive the majority of your tax slips by February 28.

Tax Credit: A tax credit is a deduction from taxes you owe. Provided you can use the tax credit, each taxpayer receives the same tax benefit, regardless of how much income you earn.

There are two types of tax credits: refundable and nonrefundable. A refundable tax credit is a tax credit you’ll receive if you’re eligible.

A nonrefundable tax credit is only available when you meet specific conditions.

Tax Deduction: A tax deduction lowers the amount of your taxable income, depending on your marginal tax rate.

Marginal Tax Rate: A tax system used in Canada where the more taxable income you earn, the more tax you’ll pay. Your marginal tax is the tax you’ll pay on the next dollar of income you earn.

Tax Brackets: The federal and provincial governments have different tax brackets to calculate how much taxes you owe. Generally, the higher your tax bracket, the higher your marginal tax rate.

Tax Refund: A tax refund is money you get back from the CRA when you remit too much tax.

Balance Owing: When you have a balance owing, generally, you must file your tax return by April 30 along with the payment, or you could face late filing penalties and interest.

Conclusion

As our expedition through the Canadian tax refund landscape comes to a close, you now stand on the brink of mastering this crucial financial rite of passage.

Armed with knowledge and insights, you’re ready to claim what’s rightfully yours and perhaps even find joy in the process. Remember, the path to your tax refund doesn’t have to be a solitary trek—guidance is always within reach.

Happy claiming!

But wait, there’s more! You might also be interested in the following:

Canada Tax System: How it works
Tax Consulting in Canada: An Expats Guide
Tax Number in Canada: An Expats Guide