Many tax preparation companies offer a “cash back” option, meaning that they give you cash on the spot after preparing and filing your tax return. H&R Block is the most common example, but many smaller companies offer the same option. But is it worth it?
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How do instant tax refunds work?
Initially you bring your tax information to a tax preparer. They take this information, like your T4, put it into their software and prepare your tax return. As part of the sales process they ask if you’d like to get an instant refund or would like to wait for your refund to be sent to you by the CRA. If you opt for the instant cash, you then assign your tax refund over to the tax preparer. When CRA finalizes your return, they send the tax refund to the tax preparation company.
The catch is that the cash amount you receive is not the full amount of the expected refund. You are paying an extra fee to get your cash sooner. In effect, you are borrowing against your tax refund and there is a cost to do so.
What’s the cost of an instant tax refund?
Fees for instant refunds are set by the Federal Government of Canada at 15% for the first $300 of your refund and then 5% on the rest.
That means that if your tax refund is $1,000, the tax preparer keeps $80 in fees and they’ll give you $920.
The question you need to ask yourself is how long will it take to get my tax refund from CRA and is this fee to get an early refund worth it?
The CRA usually begins processing tax returns in mid-February. You may be able to file earlier but that’s only if you have all your tax information. Employers are not required to complete their T4 and other information returns until the end of February. Some do so earlier, especially if they are on an electronic payroll system but it’s more likely you will receive your information some time during late January or early February.
According to the CRA notice on tax refunds, their goal is to process paper tax returns within eight weeks. However, tax preparation companies are not filing paper returns. They are e-filing your taxes. Returns that are filed electronically are typically processed in a matter of days and usually within two weeks. If you choose direct deposit, you can receive your tax refund from the CRA even faster.
Why instant tax refunds are worse than payday loans
So, if you can file as early as February 1 you might get your refund money through an instant refund a month earlier than you would directly from the Canada Revenue Agency. If this is the case, you paid $80 to borrow $920 for one month or the equivalent of 104% annual interest.
If you don’t see a tax company until the end of February, you might only get your refund at most two weeks earlier than if you just wait for the CRA to deposit your refund directly into your bank account. That would mean you borrowed $920 for two weeks at a cost of $80 or roughly 226%.
That’s pretty close to payday loan rates.
Our recommendation is to file your return electronically, apply for direct deposit and wait for your income tax refund to come directly from the CRA. If you are tight on cash, that extra $80 might come in more useful than getting your money just a couple of weeks earlier.
If you want to check on the status of your refund with the CRA you can do this online through your MyAccount or MyCRA mobile app or call 1-800-959-1956. If you call you will need to provide your social insurance number, month and year of birth and total income from line 150 on your current year return.