Most of us look forward to getting a refund from the government when taxes are due, but are fearful of the opposite (owing taxes...). What makes it a refund and how can you predict whether or not you will receive a refund?
To start off, there are usually 3 parts to your taxes that could get refunded, which are the same as the deductions from your pay on your pay cheque : Income tax refund, Canada Pension Plan (CPP), Employment Insurance (EI).
The reason for any of those 3 to be refunded is overpayment during the year. As you make money during the year, a portion goes to the government as approximate amounts of tax you will have to pay.
These are the 4 most common scenarios under which you would get a refund:
1. You earned commission or a bonus during the year, and the amount of tax deducted when it was paid out was too high;
2. You have contributed to an RRSP (more on that later);
3. You switched jobs during the year (you'll likely get a CPP refund);
4. You were eligible to take advantage of a tax credit such as a credit for buying public transit passes, making donations or paying tuition; and
5. You did NOT have any additional income such as investment income or money earned from a side business.
As for the CPP and EI refunds, most of the time, you'll only get a refund of CPP or EI if you worked more than 1 job, switched jobs or earned less than $3,500 during the year. The reason for this is because all employers are required to deduct CPP and EI to the maximum limit, so if you had more than one employer, they would each deduct up to the maximum, and you would end up paying over the maximum. This amount will get refunded when you file your tax return.
Just remember, the amount of tax paid through out the year is only a best estimate and does not mean that the government will actually keep everything that they get through out the year.
This estimate will be based on that tax form (TD1) you fill out when you first start working for a new employer. Remember that form that starts with a number and then asks about dependents, tuition, etc, well, it is used to figure out how much tax should be withheld from your pay cheque. Your employer is unlikely to ask for a new one every year, so if you go back to school for example, you should ask your employer to fill out a new form to reduce the tax withheld on each pay. This means that you'll pre-pay less tax during the year, but also get less of a refund at the end of the year.
If you want to see how the tax deducted from your paycheque is calculated by your employer, here is a link to the website: http://www.cra-arc.gc.ca/pdoc/
Hope you can figure out if you're likely to get a refund... if you are, don’t spend it all in one place :)