Is it true that a big tax refund means you’re winning at taxes?

For this week’s Reality Cheque, we’re looking at the money myth that a tax refund is always a good thing.

A tax refund won’t fill the Shane-and-Ilya-shaped hole in your heart, but might feel like winning the MLH Cup. Hundreds of dollars appearing in your bank account—what’s not to like? But receiving a large income tax refund isn’t truly a good thing, and we’re here to bust that myth.

Why do tax refunds happen in Canada?

If your employer withholds too much tax during the year, the government gives you back the excess in the form of a refund. That’s the most common scenario for a tax cheque.

“It’s your own money back,” says Robb Engen, advice-only planner at Boomer & Echo Financial Planning. “A tax refund isn’t a reward from the government. It just means you paid more tax than necessary during the year.”

A tax refund doesn’t only happen because someone made a mistake; it’s just the nature of our tax filing system. For most employees, your employer will look at your salary and use payroll tables to determine roughly how much tax to take off your paycheque and send to the Canada Revenue Agency (CRA). But those payroll tables don’t show the full financial picture. They don’t reflect tax deductions from, for example, eligible contributions to registered savings plans, charitable donations and medical expenses. Even starting a hobby-turned-side-hustle can throw off the numbers.

Those deductions aren’t factored in until you file your income tax return, and the true calculations reflecting your full financial picture happen. If the government collected too much tax, you’ll get a refund, money that you could’ve used throughout the year.

Still not convinced that the April windfall has a downside? Consider this scenario laid out by Ryan Minor, Director of Tax for CPA Canada. “A $2,000 refund means you overpaid your taxes by about $167 per month during the year. Instead of giving the government an interest-free loan, that money could be used to build an emergency fund, contribute to your retirement or pay down high-interest debt.” (Should you invest or build an emergency fund?)

Even just having the extra monthly cash flow for groceries and utilities can be helpful, says Minor.

Common perpetrators: RRSP, childcare expenses, and more

What triggers an overpayment in tax? Things like contributions to your registered retirement savings plan (RRSP), childcare expenses, medical expenses and even short periods of unemployment can cause an overcollection of tax. A good example of an action that could trigger a refund is paying into your RRSP, because it lowers your taxable income amount.

Assume you earn $85,000 per year while living in Ontario. Your employer estimates that you should pay $21,459 in taxes and takes that much off your paycheque. If you contribute $20,000 to your RRSP, this tax-deductible contribution essentially lowers your taxable income to $65,000, which means you’ll only need to pay about $15,400 in taxes.

That’s a big difference. Since your employer collected too much, you’ll receive about $6,000 in a refund.

How to get a $0 tax refund

While a $0 refund would be the best way to ensure you don’t overpay any taxes, you can’t predict down to the dollar what will happen with your money in a given year. “The goal isn’t necessarily zero, but getting reasonably close is,” says Engen.

The first step is to make sure your Form TD1 is accurate. “The TD1 plays a bigger role than people realize,” says Engen. This is a tax form that your employer will have you fill out on your first day. Many Canadians fill this form and never think of it again, but it’s smart to revisit it from time to time to make sure it’s accurate.

“As a general rule, Canadians should revisit the TD1 whenever there is a significant life change,” says Minor. He says getting married, having a child, starting a second job, or becoming eligible for new tax credits are all good reasons to revisit your TD1 form.

The next step is to adjust how much tax your employer collects for you. You can do this by submitting a T1213 Request to Reduce Deductions at Source form to the CRA. Once the CRA approves your request, your employer can reduce the amount they collect.

While getting an income tax refund back isn’t great, owing money to the government at tax time isn’t the goal, either. Owing taxes means the government didn’t collect enough tax, and you’ll need to pay the difference. While this isn’t inherently bad, if you don’t have the funds available to pay the outstanding balance by the due date (in 2026, that’s April 30), you’ll incur interest charges and late fees.

Do you have to reduce your income tax refund to zero?

While reducing your income tax refund to zero dollars is the most mathematically optimal way to manage your money, that doesn’t account for the psychological factors at play. Some people prefer a large tax refund and see it as a way to force themselves to save a large sum of money they wouldn’t otherwise set aside. But auto deposits to a savings account with a competitive interest rate are better. Think compound interest. 

So, if you do find yourself with a large refund in your hand, and you’re thinking you could have put that money to better use during the year (saving or, say, by spending a few weeks at a certain iconic Heated Rivalry cottage in Muskoka) review your TD1 form or file a T1213 form with the CRA.