Everything you need to know about an income tax refund

KEY TAKEAWAYS

✔ Some of the ways you can qualify for a Canada Revenue Agency (CRA) income tax refund include paying too much tax and being eligible for deductions and credits.

✔ Use free income tax calculators to see if you qualify for an income tax refund this year.

✔ Always file your income tax return before the deadline in case you have to pay additional taxes to the CRA.

Every year, over [i]28 million Canadians file their annual income tax return with the Canada Revenue Agency (CRA) and, depending on the details of the return, some may get an income tax refund. Here’s what you need to know to see if you qualify for a refund and what to do if you get one.

What is an income tax refund?

A refund is based on the sum of all your financial activities throughout the year, including your income, the tax taken off each paycheque, and any deductions or credits you may qualify for. In other words, the CRA doesn’t have the full picture until the year is over and you’ve filed your income tax. That’s why it’s important to file your taxes on time and before the deadline.

The good news is that if you’ve already filed your income tax return for 2023, you can enter the information into an online income tax refund calculator to estimate whether or not you should expect an income tax refund. Give it a try.

Here’s a quick guide to help you understand income tax refunds, who gets them, and some clever ways to put yours to work for you.

Who gets an income-tax refund?

If you’re working in Canada, you know that income taxes get deducted from every paycheque based on your income tax bracket. The federal government takes its share, and the province or territory where you live also collects a portion.

You won’t know if you paid too much income tax until you file your income tax return, claim all the deductions and credits you qualify for, and wait for the CRA to assess everything. If you paid too much, the government will refund the difference between what you paid and what you owed. And that’s why some people get a refund.

There are many reasons why you may be eligible for an income tax refund. Some are planned and some happen when your circumstances change throughout the year. Here are examples of planned and unplanned events that lead to a refund.

Planning for a tax refund

One of the most common ways Canadians plan for a tax refund is by contributing to a registered retirement savings account (an RRSP). It’s not always easy to set money aside for the future but an RRSP is a great way to begin saving for retirement and lowering your current tax bill.

How it works

At the end of the year, you can deduct the amount of money you put into an RRSP from the amount of your total income. Because you likely paid income tax on the total amount you made throughout the year, the RRSP deduction will result in you having “overpaid” taxes so the government will “refund” the difference.

Unplanned tax refunds

Sometimes an income tax refund is unplanned due to changes in your income throughout the year. These refunds are hard to predict because people change jobs, get laid off, or spend time between jobs with little or no income. This can lead to an overpayment of tax and a refund you never knew you were owed.

How it works

When an employer deducts income tax from your paycheque, the amount is based on the idea that you will continue to earn the same amount all year. This way, you should end up paying exactly what’s owed. However, if your income drops because you change jobs, or your income gets disrupted for a while, you may have overpaid throughout the year. And again, the CRA will return your money in the form of an income tax refund.  

How to spend your income tax refund

You can do whatever you want with your income tax refund. The money is yours and it won’t be added to your income in the current year, so what you do with it is up to you.

Spend a little

Treat yourself to something you’ve been putting off like new clothes for work, a getaway, or repairs around your home. Consider using part of your refund to make some smart moves toward improving your finances, like saving for someTHING or someDay. Here are a few ideas to get you started.

Save for tomorrow

Carve off part of your income tax refund for savings and either set it aside in a separate account or invest it in an RRSP so you can plan for a refund next year.

Pay down debt

If you apply your refund, as a lump sum, to any of your outstanding debts, you immediately reduce the amount of interest you have to pay. Which means it can help you pay them off faster. For example, paying down the balance on a high-interest credit card would cut the interest charge on your next payment and get you closer to becoming debt-free.

A tax refund is a nice way to get some extra money in your pocket. At easyfinancial, we have resources that can help you understand how to use your extra cash, when to borrow to pay down debt, how to manage large expenses, and other ways to improve your financial literacy.  Visit our goeasy Academy and learn how to plan for a better financial future.

Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.

[i]Statista Website. Number of tax filers in Canada in 2021, by province. Viewed April, 2024. Source.