Tax Credit vs Tax Deduction in Canada

When completing your tax return, you’ll likely notice the terms tax credit and tax deduction. But what is the difference between tax credit vs tax deduction? In short, one reduces your taxable income whereas the other reduces your tax liability. However, there are other nuances to consider, which are described below. Continue reading to learn more about the unique differences between tax credits vs tax deductions in Canada.

Tax Credit vs Tax Deduction Canada

What is a tax deduction?

Tax deductions are eligible amounts that reduce your net income for tax purposes. Normally, your net income is calculated first, then tax deductions are taken off the total. This step comes before tax credits in the calculation process.

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What is an example of a tax deduction?

Here are some common examples of tax deductions in Canada:

  • RRSP Tax Deduction. If you contribute to your RRSP throughout the tax year, you can claim it as a tax deduction. The amount of your RRSP contributions directly reduce your net income by the same amount. 
  • Other retirement deductions. Similar to the RRSP tax deduction, there are other deductions available for registered pension plans (RPP) and pooled registered pension plan (PRPP) employer contributions. 
  • Professional dues. If you pay annual professional dues, like union fees or professional insurance premiums, you can deduct it from your net income. Note that these fees must be required to maintain professional status and are not reimbursed by your employer. 
  • Childcare expenses. People who pay for childcare in order to earn an income, obtain an education, or carry on research can deduct the related costs. 
  • Moving expenses. Those who relocated to work, run a business, or study can deduct their moving expenses. 
  • Disability supports deduction. Individuals living with a physical or mental impairment who incurred disability support expenses to work, receive an education or partake in research funded by a grant are eligible for this tax deduction. 

What expenses are tax deductible in Canada?

There are a wide range of expenses that are tax deductible. If you’re self employed, you can usually deduct business expenses against your income too. The main tax deduction buckets include: 

  • Family, childcare and caregivers
  • Disability and medical
  • Education
  • Pension and retirement savings plans
  • Employment

Related Reading: Is CPP Taxable Income?

What is a tax credit?

On the other hand, a tax credit reduces your tax liability. In other words, you first calculate your tax balance, then tax credits reduce it. Subtracting tax credits is the final step before arriving at your refund or balance owing. 

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How does tax credit work in Canada?

First, taxpayers calculate their total tax owing based on their income. To do so, refer to the federal and provincial tax brackets or your local combined tax rate. Once you have your tax owing amount, tax credits are amounts that reduce your tax liability. Of course, the more tax credits you claim, the less tax you’ll pay. 

What tax credits do I qualify for Canada?

Below are some common tax credits you might be eligible for: 

  • Basic personal amount. This is a tax credit that protects low income earners. Essentially, it allows Canadians to earn a small amount of income tax free before a liability arises. Every Canadian is eligible for this tax credit. 
  • Age amount. If you’re 65 years of age or older, you get a tax credit!
  • Spouse or common-law partner amount. Married and common-law partners receive a tax credit – sorry single Canadians!
  • Eligible dependent and caregiver amounts. If you have a dependent and/or are a caregiver, you can receive some additional tax credits. 
  • Canada employment amount. Do you have a job in Canada? You can claim this tax credit! Unfortunately, self employed individuals are not eligible. 
  • Home buyers’ amount. If you purchased a home for the first-time, then you’re qualified for this tax credit. 
  • Disability amounts. The disability tax credit (DTC) offers credits to individuals who are living with a physical or mental impairment. 
  • Home accessibility expenses. To claim this credit, you must also be eligible for the disability tax credit (DTC). If you incurred costs to make your home more accessible to your impairment, you can claim this tax credit. 
  • Education tax credits. Attending school? You can receive a tax credit for certain amounts, including tuition, textbooks, and interest on student loans. 
  • Donations and gifts. If you gave to a charitable organization, you can obtain a tax credit for your contribution. 

Related Reading: Guide To Tax Credits: How To Get A Bigger Tax Refund

What is the difference between tax credits and tax deductions?

As you can see above, tax credits vs tax deductions in Canada are not the same, but they do share some similarities. The main similarity is they both reduce your overall tax liability in one way or another. In addition, they both have certain criteria that must be met in order to claim the tax credit or tax deduction. 

In terms of differences, tax deductions reduce taxable income whereas tax credits reduce your tax liability. Furthermore, tax deductions are usually calculated by summing eligible amounts whereas tax credits are a percentage of some base. 

Which is better a tax credit or a tax deduction?

Neither is better, they both offer reductions to allow for a smaller tax balance. However, tax deductions might be slightly better, simply because they reduce taxable income before the tax balance is calculated. Naturally, the lower your taxable income, the less your tax balance will be. But with that said, tax credits directly reduce your tax balance. For this reason, most people prefer tax credits because you can see the direct effect on what you owe.

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How can I reduce my income tax in Canada?

You can reduce your income tax bill by using tax credits vs tax deductions in Canada. The more you can claim, the better! Aside from tax credits and deductions, there aren’t many ways to reduce your income tax. However, the more you understand about the tax system, the more you can take advantage of tax credits vs tax deductions in Canada, and more, like capital gains tax and tax loss harvesting.

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