What is an Income Tax Refund? Why do some people get an Income Tax Refund?
A tax refund for most people is a refund of money they have previously paid to the government in the form of source deductions or installment payments. To a lesser extent, a tax refund may be a benefit or credit that the taxpayer has qualified for due to their personal or family circumstances.
All income earned or received by Canadians is subject to income tax. But depending on the amount of income, whether the taxpayer is single or part of a couple or a family, and what expenses they might incur, the taxpayer may have a bigger or smaller tax bill.
Other factors affect tax refunds. In particular, employers are required to make payroll deductions for income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. They might also have to deduct pension plan or RRSP contributions, union dues, charitable donations, or any number of other deductions. The income tax, CPP and EI deductions are remitted by the employer directly to Canada Revenue throughout the year. When the individual taxpayer files their income tax return, those deductions are reported as having already been paid to CRA.
A refund may occur when the deductions that were made at source, called “source deductions” exceed the amount of tax calculated in the tax return preparation.
For someone who is self-employed, there is technically no source deduction from a pay cheque, and therefore no prepaid amount sent to the government that could later be returned as a refund.
Income tax installments are required if an individual owed $3,000 or more for two years in a row upon filing their tax return, over and above what was deducted and remitted at source. This could apply to someone self-employed, or could be for someone who has income from rental property, investments, or pensions, or more than one job.
We will be reviewing the importance of tax planning next.
We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website anytime at www.actionfinancialgroup.com.
Karin Rimnyak, Certified Financial Planner®
David Dryburgh, Certified Financial Planner®
Ian Barrie, Certified Financial Planner®
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.