Personal Finance

Understanding how Income tax return works

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  • Feb 9th, 2017 11:13 pm
[OP]
Deal Addict
Sep 5, 2010
2330 posts
363 upvotes
Toronto

Understanding how Income tax return works

Let us say for 2016, I paid $5000 in payroll taxes.

For simplicity's sake, let us assume I had no RRSP.

For 2016, my total non-refundable tax credits was $5000

Does that mean I get $5000 back when I file my taxes?

Is that how it works?

And I am also assuming if my non-refundable tax credits were over $5000, I would still only be able to get $5000 back, and not a cent extra?


Trying to understand how the whole thing works.
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3 replies
Newbie
User avatar
Nov 8, 2009
73 posts
11 upvotes
Mississauga
Woodbridge905 wrote: Let us say for 2016, I paid $5000 in payroll taxes.

For simplicity's sake, let us assume I had no RRSP.

For 2016, my total non-refundable tax credits was $5000

Does that mean I get $5000 back when I file my taxes?

Is that how it works?

And I am also assuming if my non-refundable tax credits were over $5000, I would still only be able to get $5000 back, and not a cent extra?


Trying to understand how the whole thing works.
So the sad truth is that you haven't paid any tax yet. Payroll is simply sending the money to the government early in worrying that you would otherwise spend it.
When comes the tax season (now), you file tax.
Say you made 35k last year.

You file tax and tell CRA that "hey, look, I made $35k"
CRA says, "great! that means you owe us $4800 based on my book."
You say, "WTH you talking about?! Payroll already paid $5000"
CRA says, "fine! here is $200 back to you. Peace! See you next year"
Deal Addict
Mar 10, 2011
2310 posts
422 upvotes
Toronto
op in general yes thats how it would work but be careful as the actual tax cedits are worth about 17% or so of the stated amounts on your income tax return. For example the basic personal amount is $11474, but the actual tax credit is about 17% of that so its really around $2000.
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User avatar
Aug 8, 2012
10198 posts
4006 upvotes
BC
Woodbridge905 wrote: Let us say for 2016, I paid $5000 in payroll taxes.

For simplicity's sake, let us assume I had no RRSP.

For 2016, my total non-refundable tax credits was $5000

Does that mean I get $5000 back when I file my taxes?

Is that how it works?

And I am also assuming if my refundable tax credits were over $5000, I would still only be able to get $5000 back, and not a cent extra?


Trying to understand how the whole thing works.
I'm not sure there exists such a thing as a "refundable tax credit" in Canada. Did you leave out the "non" the 2nd time?
[EDIT: Looks like you edited after I quoted you and while I was drafting this post.]

There are "non-refundable tax credits". Those are things calculated at set percentages that are available to use as credit towards taxes you owe, but if they exceed the taxes you owe you don't get a refund out of it.

By "owe" here I mean what the tax-man says you should have paid, not what's left over and you may happen to have outstanding still at tax-time.

The correct term I guess is taxes PAYABLE. This is what is calculated at tax time. Then you subtract what you already paid throughout the year to get either an amount OWING, or a REFUND.

What you paid already through payroll taxes is just an estimate that hopefully is pretty close so come tax time there isn't a large refund or amount owing.

So your question is missing an important #, and that is how much tax is actually payable.

If $5000 was withheld, but $6000 is payable, then you owe $1000. If you have $5000 of non-refundable tax CREDITS, that would have been factored into the tax forms to arrive at the PAYABLE amount and then you'd see your payable was $1000. If your payable is $1000 and you paid $5000 you'd get a $4000 refund.
If your payable is $0 and you paid $5000, then you would get a $5000 refund.

You need to know PAYABLE in addition to the amount you already paid through payroll deductions.
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