“At TMFG, we review our clients’ tax situation annually. And that typically starts with a review of the most recent tax return and notice of assessment.
From these reviews, I have seen many different attitudes when it comes to the results. But, more often than not, most are quite happy to receive a refund.
Now, because I am constantly reviewing tax situations, I understand the concept of income earned and taxes payable. For many, preparing tax returns is something that they would prefer to delegate to someone else. Or, just prefer doing literally anything else instead. Heck, I am having a hard time writing about it, but thought a little insight would be helpful to those who don’t have any inclination to learn.
Basically, if you earn income in a calendar year, you will have income tax calculated against it. The more income you earn or receive, the higher the rate of income tax calculated against it. Let’s look at a simple situation of a Canadian whose sole income is earned from an employer. They will have one form of income and there will be a set amount of income tax calculated against it. However, through the year, his/her employer is deducting income tax from each of the pay periods and forwarding it directly to Canada Revenue Agency as a “credit” of taxes paid for the amount owing on the income earned in that year.
Therefore, if you earned $50,000 of employment income in 2020, then your maximum income tax bill is $7,792 (resident of Ontario). If the amount of income tax that your employer deducted with each pay is in excess of $7,792, then you will receive a refund. And, vice versa.
A large refund simply means that the amount of income tax deducted at source and credited throughout the year was far in excess of what was calculated on the eventual income earned. There are strategies to consider in order to reduce income earned in order to generate a refund, however, those are beyond the scope of this simple message.For those of you wanting to discuss your tax return in more detail, please don’t hesitate to contact your advisor.”