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A tax deduction reduces your tax bill, and tax refunds are different. Tax refunds are what you receive when you pay too much tax to the federal government. Due to this, not everyone who files a tax return receives a tax refund.
How Tax Credits Work
Tax credits work by directly reducing the amount of tax that you owe. These often lead to tax refunds. How much you can save and what your refund is will depend on your total income, what you qualify for and what type of credit you qualify for. In Canada, there are two different types of tax credits: refundable and non-refundable.
Refundable Tax Credits
Refundable tax credits are the type of tax credit that reduces the amount of tax that you pay and can result in a tax refund. You can receive these tax credits no matter how much you pay or need to pay in taxes. In Canada, there are many different types of refundable tax credits. These include:
- GST/HST (Goods and Services Tax/Harmonized Sales Tax) Credit
- Canada Training Credit
- Refundable Medical Expense Supplement
- Canada Workers Benefit
- Canada Carbon Rebate
- Canada Child Benefit
- Ontario Sales Tax Credit
- Ontario Energy and Property Tax Credit
- Northern Ontario Energy Credit
Non-Refundable Tax Credits
The other option for tax credits is non-refundable tax credits. These credits are designed to reduce the amount of tax that you owe. However, they can’t go below zero. This means that they aren’t designed to provide you with a tax refund. In Canada, there are many different types of non-refundable tax credits. These include:
- Disability Tax Credit
- Child Disability Tax Credit
- Canada Caregiver Credit
- Home Buyers Amount
- Employment Insurance Premiums
- Multigenerational Home Renovation Tax Credit
There are also other provincial tax credits you claim, like property tax credits for some property taxes and tuition tax credits for tuition fees.
How Tax Deductions Work
Tax deductions differ from tax credits. While they still reduce the amount of income tax that you owe, it’s done so in a different way. A tax deduction lowers your net income, which in turn reduces your total tax burden, no matter your tax situation.
Provincial & Federal Tax Credits
In Canada, there are many different types of tax credits. We’ve already discussed the refundable credits and non-refundable credits. However, there are also provincial and federal tax credits. You may be wondering why it’s important to know why there are both federal and provincial tax credits. Well, it’s important so you know what you qualify for.
In Canada, you’re eligible for federal credits no matter where you live in Canada. When it comes to provincial tax credits, you do have to live in the province in order to qualify for them. This means that these credits aren’t available to all Canadians.
Tax Credit vs Tax Deduction
When it comes to tax credits and deductions, how they differ can be confusing. In general, they can all reduce the amount of income tax that you owe; that said, how each of these works is very different.
When it comes to tax credits, refundable tax credits allow you to reduce the amount of tax that you owe and allow you to get a refund. Non-refundable tax credits just reduce the amount of tax payable that you owe. Tax deductions, on the other hand, reduce your total taxable income. While this does reduce your tax liability by reducing your income, they don’t have an impact on the amounts owing once they’ve been calculated.
Is A $200 Deduction Or A $200 Credit Worth More
One of the most confusing things about claiming tax credits and tax deductions is which is worth more. Well, you might be surprised to learn that a tax credit is worth more than a tax deduction. This is because a tax credit takes the amount directly from the tax owed. A deduction reduces the taxable income amount. Because of the calculation of taxes from the taxable income, a tax credit is actually worth more since they’re dollar-for-dollar reductions.
Getting A $10,000 Tax Refund in Canada
The only way to get a $10,000 tax refund is to have a $10,000 overpayment to the Canada Revenue Agency. Many people think that with a tax deduction of $10,000, like the home buyer's amount, you can get a $10,000 refund, but that isn’t the case. In this case, you get $10,000 taken off of your taxable income.
For example, if you make $70,000 in a year and claim the $10,000 home buyer amount, your income is now reduced to $60,000. This won’t give you a $10,000 refund, but you’ll only have to pay taxes on $60,000. Any tax you paid on the remaining $10,000 will be given as a refund. If those taxes haven’t already been paid, then the amount you owe will be reduced.
The Difference Between A Tax Credit And A Tax Relief
A tax relief, also known as a tax exemption, is different from a tax credit. In Canada, some forms of income for both personal and corporate income taxes are considered to be exempt. This means that you don’t pay taxes on that part of your income. Here are some examples of exempt income in Canada:
- Lottery winnings
- Gifts
- Inheritances
- GST/HST Credit
- Canada Child Benefit (Child Tax Credit)
- Canada Carbon Rebate
- Child support payments
- Family allowance payments
- Life insurance amounts
- Strike pay
- Compensation for being a victim of a criminal act or motor vehicle accident
Deducting Contributions to Registered Accounts in Canada
One of the most common ways that people reduce their taxable income is by using RRSP contributions. RRSPs, known as Registered Retirement Savings Plans, are tax-deferred registered accounts that allow you to not pay income tax on any amounts that are added to your RRSP. You don’t pay the tax until your funds are withdrawn. The idea is to withdraw them at retirement when you have a lower tax rate.
In order for your contributions to be tax deferred they have to be contributed to the account before the end of the tax year. You also have to verify that the amounts that are added into the RRSP fall into your annual contribution limit. If you go over your contribution limit then you will have to pay a penalty until there is no longer an over contribution.
Another registered account that can reduce your annual taxable income is the First Home Savings Account. This account allows you to make tax-free contributions to the account in order to purchase your first home. This account can be open for 15 years and has contribution limits. You can contribute up to $8,000 per year or a lifetime amount of $40,000. As long as the funds are used to purchase your first home, you never have to pay taxes on them. If you make over-contributions, however, there will be penalties that you have to pay.
Deductible Expenses in Canada
Whether you have business expenses you incur from business income, are self-employed or are employed, you can write-off certain work expenses required by your employer; you can write these eligible expenses off in order to save yourself money when it comes time to pay your annual income taxes. Some popular expenses that taxpayers deduct are:
- Union or professional dues
- Child care expenses
- Disability support deductions
- Business investment loss
- Moving expenses
- Support payments
- Carrying charges and interest expenses
- Self-employment deductions for CPP or QPP contributions
- Self-employment deductions for PPIP premiums
- Explorations and development expenses
- Clergy residence deduction
- Social benefits repayment
- Canadian Armed Forces personnel and police deductions
- Security options deductions
- Employment expenses
- Legal fees
- Limited partnership losses
- Net capital gains
- Net capital losses
- Residency and travel expenses
- Spouse or common-law partner amount
- Basic personal amount
- Tuition amounts
- Medical expenses
- Charitable donations
- Federal dividend tax credit
- Mortgage interest
- Student loan interest
- Real estate taxes (in some cases)
Do You Have To Apply For Tax Credits?
Whether or not you have to apply for tax credits depends on the individual tax credit. Some require you to apply, while others are automatically issued based on you meeting the qualifications on your annual income tax return.
The Disability Tax Credit is one of the credits that you have to apply for. You and your doctor must fill out a form. Once it’s been accepted, you can claim this credit on your tax return. That said, this credit doesn’t need to be applied for every year. It’s good for a few years after the first approval, and you don’t have to apply again until it expires.
With the Canada Child Benefit, your application goes through when you register your child's birth certificate. You can also apply separately after. Once that’s been done, you’ll start receiving the Canada Child Benefit automatically. If you qualify for the child benefit in your province, then you’ll start receiving those payments automatically as well.
The GST/HST Credit is a tax credit that you don’t apply for at all. Those who receive this credit fall within the income tax threshold (usually low-income families) when they file their annual income tax return. As long as you meet the eligibility requirements and file your tax return, you’ll keep receiving this benefit.
Final Thoughts
In Canada, not everyone receives tax returns; however, everyone who files their taxes can claim tax deductions and credits. That said, before you claim these credits, it’s important to know which ones that you qualify for. Each of these can help you ease your tax burden each in their own way.
Tax deductions reduce your total taxable income; tax credits work a little differently. Tax credits reduce your tax payable instead. While each of these reduces the amount you pay, they just do it in different ways. Tax refunds are not guaranteed from deductions or credits either; they're based on how much you paid versus how much you owe.
If you’re unsure what standard deductions you can claim in order to pay less tax, a tax professional can help you. Each person's personal financial situation, tax bracket and filing status are different. The items that are tax-deductible are also individual to each person and make a difference in the tax you owe.
