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Tax refunds are not positive, as is widely believed. You may feel pleased when you receive a lump sum in your bank account as if you won the lottery, but don't let your dopamine rush fool you. The reason for your tax refund is that you overpaid the government. There was an overpayment of tax to the CRA, which is now being refunded to you. A large refund will result in you losing out on investment, spending, and interest opportunities throughout the year.Even though experts often state Canadians should save between 10 and 20% of their income, Canadians only manage to save about 1.7% of their income. When the government is chasing after everyone, trying to collect the exact amount due, it will be extremely difficult for the government to rely on a consistent revenue stream. Taking money directly from a paycheck and remitting whatever has been overpaid is much easier and more reliable.

How Does a Tax Refund Work

Employees and self-employed people receive refunds in different ways. Here are the details.

Tax Refunds for Employees

The government collects tax from employers at the point of origin from your paycheque before it reaches your bank account. In order to determine how much tax they owe, employed individuals must file a tax return detailing their income, deductions, and credits by April 30 of the following year. Government refunds money if they are paid more than they are owed. If the employees did not pay the full amount (most likely because they have investments or other sources of income), they have until April 30 to make up the difference.

Tax Refunds for Self-employed

Individuals who work for themselves throughout the year are responsible for their own cash flow. At the beginning of the year, self-employed people should determine the average tax rate. Once they have done that, they should transfer the percentage of each paid invoice to a separate bank account. The self-employed calculate their average tax rate after subtracting all of their income, expenses, deductions, and credits at the end of the fiscal year. The CRA needs to receive the full amount due because taxes have not yet been collected. It is harder for them as they need the willpower not to spend that money. They also need to keep up with their bookkeeping. They can either do it themselves or acquire an accounting firm for this purpose. It is rare for people who pay taxes annually to get a refund. Since this approach requires vigilance, most taxpayers pay the correct amount in taxes or nearly so. You can work with a tax accounting firm in Canada to ensure correct and prompt submission.You can also pay taxes in quarterly installments for this group. You can calculate the amount of these installments in many ways, but it's unlikely it'll add up to the exact amount owed. You'll get your money back if you overpay. Taxes owed to this group are due by April 30, and returns need to be filed by June 30.How to calculate your tax refundUse a tax calculator online or ask an accountant to calculate your refund for you.If your financial situation is complex, you may have to do a rough reckoning on paper.The final five numbers are:

  • Taxes already paid
  • Revenues from all sources
  • Deductions made in total
  • Tax rate as a percentage
  • 0.15 multiplied by the total credits

To find out your total refund, first, you need to find the tax payable. Just deduct the total deduction from the total income. Then multiply tax payable by the average tax rate to find the tax owed. Once you have that, multiply the sum of all credits by 0.15 and deduct it from the total tax owed. Deduct tax already paid from this figure, and you'll get your refund amount.

Conclusion

Tax refunds may sound good, but they actually mean that you overpaid the CRA. You could have used this money for investment or something else. Contact an accounting firm to find out earlier and put your money to good use.