Tax Deductions and Tax Credits: What’s the Difference?

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Canadian taxpayers have until May 1, 2017 to file their 2016 taxes. However, before the calendar turns over to a new year many Canadians want to know how best to maximize their tax refund or minimize what they owe the government.

The two main ways to reduce taxes owing are through tax deductions and tax credits. What’s the difference between a deduction and a credit? Let’s explore:

Tax Deductions

A deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $200,000, you are taxed at the federal rate of 33 per cent and a $1,000 deduction would save you $330 in federal tax. On the other hand, if you were earning $30,000, you are taxed at the federal rate of only 15 per cent and a deduction of $1,000 would only save you $150 in federal tax.

An example of a tax deduction is your RRSP contribution.

Deductions checklist

  • RRSP contributions
  • Union or professional dues
  • Child care expenses
  • Moving expenses
  • Support payments
  • Employment expenses (w/ T2200)
  • Carrying charges or interest expense to earn business or investment income

Tax Credits

There are two types of tax credits: refundable and non-refundable. A non-refundable tax credit is applied directly against your tax payable. So if you have tax owing of $500 and get a tax credit of $100, you now only owe $400. If you don’t owe any tax, non-refundable credits are of no benefit. For refundable tax credits such as the GST/HST credit, you will receive the credit even if you have no tax owing.

The public transit amount is an example of a non-refundable tax credit. You get a 15 per cent credit for the amount you pay for transit passes.

Credits checklist

  • Public transit receipts
  • *Children’s fitness, artistic, cultural and recreational expenses
  • Volunteer firefighter or Search & Rescue details
  • Adoption expenses
  • Interest paid on student loans
  • Tuition and education amounts
  • (T2202, TL11A), and exam fees
  • Medical expenses (including details of insurance reimbursements)
  • Donations or political contributions

*The Children’s fitness and arts credits have been reduced by half for 2016 and will be eliminated in 2017.

The Verdict

Tax deductions are straightforward: if you earned $60,000 and made a $5,000 RRSP contribution your taxable income will be reduced to $55,000. Deductions typically result in bigger tax savings than credits as long as your marginal tax rate is higher than 15 per cent.

A non-refundable tax credit, on the other hand, must be applied to any taxes owing and are first multiplied by 15 per cent. That means a $5,000 non-refundable tax credit would only result in about $750 in tax savings.

Regardless, Canadian tax filers should make a checklist of every deduction and credit available to them at tax time and take advantage of all that apply.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on March 14th and is republished here with his permission.

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