Should You Prepay Taxes to Get a Bigger Refund Later?

Many Canadians wonder if prepaying their taxes—sending extra payments to the Canada Revenue Agency (CRA) before their tax return is due—can lead to a bigger tax refund later. While it might seem like a smart way to “force” savings or avoid a large tax bill, the decision to prepay taxes requires careful consideration of the benefits, drawbacks, and alternatives. This detailed guide explains how prepaying taxes works, when it may be advantageous, and what factors you should weigh before making early tax payments.

1. What Does It Mean to Prepay Taxes?

Prepaying taxes involves making voluntary payments to the CRA before your official tax filing deadline. This can take the form of:

• Additional instalment payments throughout the year
• Overpayments when filing estimated taxes
• Voluntary advance payments

Prepayments reduce your overall tax balance and can increase the chance of receiving a refund after filing your return.

2. How Prepayments Affect Your Tax Refund

Any amount you prepay is applied as a credit toward your final tax bill. If you overpay, the CRA issues you a refund after processing your return. However, a bigger refund does not mean you paid less tax—it simply means you gave the government money upfront.

3. Potential Benefits of Prepaying Taxes

• Reducing Penalties and Interest: If you expect to owe taxes, making instalment payments or prepaying can help avoid interest charges and penalties on late payments.
• Managing Cash Flow: Spreading out tax payments over the year can make budgeting easier for some taxpayers.
• Peace of Mind: Ensuring taxes are covered ahead of time can reduce stress during tax season.

4. Drawbacks of Prepaying Taxes

• No Interest or Investment Return: The CRA does not pay interest on overpayments, so your money does not grow as it might if invested elsewhere.
• Reduced Liquidity: Prepaying ties up cash that could be used for emergencies or investments.
• Potential for Errors: Overestimating your tax liability could result in unnecessarily large prepayments.

5. Alternatives to Prepaying Taxes

• Tax Instalment Payments: For self-employed individuals or those with significant non-employment income, the CRA requires quarterly instalments based on previous year’s taxes or current estimates.
• Maximize RRSP Contributions: Contributions reduce taxable income and can lower your final tax bill.
• Tax-Efficient Investments: Investing excess funds can generate returns that exceed what you’d lose by not prepaying taxes.

6. When Prepaying Taxes Makes Sense

Consider prepaying if:

• You expect a large tax bill and want to avoid interest and penalties
• You prefer to spread out payments to manage cash flow
• You have variable income making it hard to estimate year-end taxes

7. How to Make Prepayments

You can make voluntary payments via:

• CRA My Payment online service
• Online or telephone banking
• Pre-authorized debit arrangements
• Mailing a cheque to the CRA

8. Monitoring Your Tax Account

Regularly check your CRA My Account to track prepayments, balances, and refunds. This helps ensure your payments are correctly credited and avoids surprises at tax time.

9. Consult a Tax Professional

Tax planning is highly individual. Consulting a tax advisor can help you decide whether prepaying taxes aligns with your financial goals and cash flow needs.