The tax season arrives in Canada, you’ll see that many people rush to complete their taxes at the last minute or hire a professional, such as an accountant, to do it for them. Most of the time, what you might think qualifies you for a tax deduction only qualifies you for a tax credit.
Actually, not everyone is even aware of the subtle distinctions between tax “deductions” and “credits”. They are frequently viewed as being interchangeable. However, there are some significant differences between the two tax matters.
Let’s examine the main differences:
Tax Deductions
An amount that is deducted from your gross income lowers your taxable income and is known as a tax deduction. The RRSP is one of the most prevalent types of tax deductions (Registered Retirement Savings Plan). For instance, the more money you contribute to your RRSP, the more will be deducted from your taxable income during tax season.
Suppose that in 2022 you made $200,000, but you only put $40,000 into your RRSP. Therefore, your taxable income would be $160,000 ($200,000 – $40,000); this is the figure on which your tax liability would be determined.
Tax Credits
A tax credit, as compared to a tax deduction, might lessen your overall tax liability. You can apply for a tax credit, which will lower the amount of income taxes you owe the federal government for that particular year. No matter what tax bracket you are actually in, the tax savings from the aforementioned tax credit are calculated based on the lowest tax rate, 15%, whether the amount is equivalent to $100 or $1,000.
For instance, you are now qualified for a $5,000 tax credit. 15% of that $5,000 is equal to $750. So, your federal income tax obligation that year will be reduced by $750.
The type of tax credit and whether or not you owe tax are two variables that affect the credit’s amount. Regardless of how many invoices you have, some tax credits are non-refundable, so they are useless to you. On the contrary hand, some credits, like tuition, may be convertible and have additional advantages.
Additionally, there are 2 tax credit categories that you may qualify for:
Non-Refundable Tax Credits:
These can help you pay less in taxes overall. You won’t get the difference back on your tax return if your non-refundable tax credit totals more than the taxes you owe. The spouse/common-law partner credit, medical costs, public transportation passes, charitable donations, etc. are a few examples of non-refundable tax credits.
Refundable Tax Credits:
These credits lower your tax liability. Any refundable tax credits, however, will earn you the amount of money that you don’t already owe in taxes if you claim them on your tax return. GST/HST credits, the Working Income Tax Benefit, the Children’s Fitness Tax Credit, etc. are a few examples of refundable tax credits.
The better option for your taxes? Credits or Deductions?
You can apply for a wide range of federal, provincial, and territorial tax credits and deductions in Canada during tax season. You may be eligible to receive a tax refund if you qualify for any of those credits or deductions. However, which ones will have the greatest effect on your bank account is based on the amount of income that you tend to generate on a yearly basis. Once you have a bit more knowledge, you may start claiming all of the tax credits and deductions available and maximise your tax return.
If you have any questions regarding tax types, feel free to contact finnection via email at info@finnection.ca or call us at (647) 795-5462
Disclaimer: Above information is subject to change and represent the views of the author. It is shared for educational purposes only. Readers are advised to use their own judgement and seek specific professional advice before making any decision. Finnection Inc. is not liable for any actions taken by reader based on the information shared in this article. You may consult with us before using this information for any purpose.