How Tax Refunds Work in Canada

A tax refund is issued when you pay more taxes than you owe. But getting a tax refund doesn’t necessarily mean you made a mistake. Sometimes, refunds are the result of claiming certain credits or deductions on your tax return.

Curious to know why you are (or aren’t) getting a tax refund this year? Here’s how they work.

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 paycheques.
You overpaid when making your quarterly tax payments as a self-employed individual.
You failed to claim a tax deduction or credit that you were eligible for.

Nerdy Tip: You can use “Change my Return” in CRA My Account to request a review of past tax returns as far back as ten years. Doing so may result in a tax refund if there were deductions or credits you failed to claim.

Who receives a tax refund?

Anyone who has overpaid on their taxes may be eligible to receive a tax refund. Whether your employer deducted more than they should have from your paycheques or you overpaid when making your quarterly installment 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 cheque but the CRA notes that the fastest way to get your refund is by signing up for direct deposit.

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

How to calculate your tax refund

When you fill out your tax return, the final step is to subtract 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 that 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 child care expenses, and you can use tax credits for tuition fees or charitable donations.

An additional factor that would affect 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 three following dates: May 30 of the tax year, on the 30th day after you file your return or on 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, owe GST or HST, or have any outstanding government debts like student loans. Additionally, if you are owed $2 or less, the CRA will not process the refund.

What should you do with your tax refund?

Obviously, what you do with your refund is up to you. It can be very tempting to see it as a windfall and go on a shopping spree. A far wiser (if less entertaining) use for a tax refund would be to see it as a welcome opportunity to pay down some debt, start an emergency fund or invest it in a TFSA or RRSP.

If you are self-employed and pay taxes in quarterly installments, you can use your refund to make your payments more manageable. You can do this by electing to have the CRA transfer your refund to the amount owing on your next future installment payment.