March 8, 2012 | In: General

Do Tax Refunds Count as Income for Taxes in Canada?

It’s that time of the year again, where everyone is doing his or her taxes. Instinctively, we report every income we received in the previous year in our tax return – but how about that $2,000 tax refund we received back in last year? Does it count as income?

I will discuss the issue of taxation on tax refunds only for Canada, and not for the US – because while the tax code in these countries is very similar, it is slightly differs when it comes to how tax refunds are handled.

So, do I have to report tax refunds on my tax return in Canada?

No, you do not. The thing is, from CRA’s (Canada Revenue Agency) perspective, the money that you have received on your tax return was money that you was already taxed in the previous year – so it doesn’t make any sense to report it again and pay tax on it (again, that money has been already taxed).

Think about it this way: You made $50k last year, and you paid $20k in taxes. After submitting your tax return, the CRA and the Provincial tax agency both decide that you have overpaid for taxes, and you should have only paid $18k, which means that for the whole $50k, you should have only paid $18k, thus you overpaid $2,000 (which means you will be refunded that amount). The $2,000 was already taxed and accounted for in the $18k. I think I have explained it in a way that couldn’t be clearer.

Note that this applies across the board for any type of tax refund, and it is regardless of whether the tax refund is federal or provincial.

Again, in the US, tax refunds are treated differently and may be subject to taxation.

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