How Tax Refunds Work In Canada

Put simply, you get a tax refund when you pay more income tax than you owe. The amount of tax you pay is determined by your total income, less any credits and deductions, multiplied by your average tax rate.

There are several scenarios that could result in a tax refund:

• Your employer takes off too much tax through payroll deductions. When you start a job, you’ll be asked to complete a TD1 form, or personal tax credit return, that determines how much tax is withheld from your income. If too much tax is deducted, you’ll receive a refund for the difference.
• You make contributions to your Registered Retirement Savings Plan (RRSP). Contributing to an RRSP helps you save for retirement and reduces your taxable income, which may result in a tax refund, especially if your employer is withholding tax based on your full income.
• You’re self-employed and you’ve overpaid your installments. If you’re self-employed, you’re likely making your tax payments on a quarterly basis. If you’ve overpaid, then you’ll be eligible for a tax refund.
• You have eligible deductions and credits. There are other deductions besides your RRSP contributions, such as child care expenses, as well as refundable tax credits, such as the GST/HST credit, that can reduce the amount of tax you owe and therefore increase your refund. Keep in mind that refundable tax credits are different from non-refundable tax credits that reduce the amount of tax you owe down to zero, but do not result in a tax refund.

Related: Where To Do Your Taxes In Canada?

Your tax refund is the difference between the total tax payable and the total income tax deducted from your income sources, plus the total amount of any refundable tax credits.

Your tax refund = Total payable – (total tax deducted from income sources + total refundable tax credits) 

For a more detailed explanation of how to calculate your income tax, and therefore how much of a tax refund you might be eligible for, Forbes Advisor Canada has this in-depth guide on What Is Income Tax?

We also have a tool to help you figure out how much income tax you’ll owe for the 2023 tax year. Find our Income Tax Calculator here.

Contributing to an RRSP helps you save for retirement and can get you a tax refund as it reduces your total income. For example, if you earned $80,000 last year, you’ll be able to contribute $14,400 (or 18% of $80,000) to your RRSP this year. Then at tax time, you’ll be able to deduct that contribution amount from your total income, so you’ll pay taxes on $65,600. However, if you paid tax (through payroll deductions, for example) based on your income before taking those deductions, then you could get a bigger refund.

There are also a number of other deductions, such as self-employed business expenses, and refundable tax credits, such as the GST/HST credit, that you may be able to claim to help you get a bigger refund.

According to the CRA, as long as you file your return on or before the due date (for the 2023 tax year, the deadline is April 30, 2024), you should receive your notice of assessment and any tax refund within two weeks when you file online, and within eight weeks when you file a paper return. In 2023, 93% of income tax returns were filed electronically, either by EFILE or NETFILE.

The CRA recommends that you wait eight weeks before contacting them for a status update on your return and tax refund. You can also check your status online anytime by logging in to the CRA’s My Account.

You may only receive part of your owed refund, or none at all, under certain circumstances, such as:

• You owe an amount to the CRA.
• You have a garnishment order under the Family Orders and Agreements Enforcement Assistance Act.
• You have other outstanding federal or provincial/territorial government debts, such as student loans, employment insurance (EI), social assistance benefit overpayments, immigration loans or training allowance overpayments.
• You have an outstanding GST/HST return from a sole proprietorship or partnership.
• You have a refund of $2 or less.

While it can be tempting to simply spend your tax refund, here are some suggestions on how to make the most of your windfall:

1. Pay down debt. If you carry a credit card balance, or only make the minimum payments each month, you’ll end up paying interest each month—and with APRs averaging 21%, that can add up quickly. You could also use your refund to pay down your student loan debt or a car loan. You’ll reduce the amount of interest you’ll pay over time, while improving your debt-to-income ratio and your credit score.
2. Make a prepayment on your mortgage. Your mortgage contract will outline how much money you can prepay on an annual basis. If you don’t have other outstanding debt with higher interest rates, prepaying your mortgage can be a smart option as it goes directly to the principal portion of your loan.
3. Contribute to your RRSP. Not only will this help you build your retirement savings, but the contribution can be used the following tax year as a deduction.
4. Start an emergency fund. A common rule of thumb is to have three to six months of your living expenses in an emergency fund. Opening a tax-free savings account, or TFSA, with your refund may be a good start.
5. Save for post-secondary education. An RESP, or registered education savings plan, allows you to save for your kid’s (or kids’) education. A huge benefit of an RESP account, besides the tax-free growth, is the federal government’s Canada Education Savings Grant, or CESG, that matches a percentage of contributions, up to a lifetime maximum of $7,200.
6. Donate to a charitable organization. Making a donation to a registered charity you care about can help fund that cause and get you a non-refundable charitable tax credit. There are federal and provincial tax credit rates and you can claim up to 75% of your net income on your tax return.

Few people look forward to income tax season but once you learn that the majority of Canadians either get a tax refund or don’t owe money at all, tax season becomes a little less taxing for everyone.

Related: How Tax Refunds Work In Canada