When 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. There are a few tax credits and deductions that many taxpayers can overlook or are unaware they can use because of the frantic atmosphere that can accompany any tax season. They won’t ultimately benefit the most from their income tax returns as a result.

Not everyone is even aware of the subtle distinctions between tax “deductions” and “credits” as they are frequently viewed as being interchangeable. However, there are some significant differences between the two tax matters.

How Do Tax Brackets Work?

Your “tax bracket” is determined by how much money you make in a given tax year and how much of that money will be subject to federal, provincial, and territorial taxes. You will pay more in taxes the higher your tax bracket. Suppose, for example, that you made $60,000 in a single year. In 2021, the first $14,398 is tax free as the basic amount. The 15% tax credit kicks in above the basic amount. Each tax bracket has a different tax rate that may vary from year to year.

To learn more about your own tax rate, visit our website to try out the tax calculator.

Rates of Federal and Provincial Taxes

The provincial/territorial tax rates are unique to each Canadian province, despite the fact that the federal tax rates are the same in every province. However, for the sake of simplicity in this post, we’ll limit our discussion to the federal tax credits and deductions to provide a more fundamental perspective.

Tax deductions versus tax credits

Your tax bracket is one of the primary distinctions between tax credits and tax deductions. No matter what tax bracket you are in at the time your application for a particular tax credit is approved, you will receive the same tax break. Contrarily, tax deductions are based on your net income, thus the amount you can deduct depends on your tax rate.

A good way to look at it is tax credits are applied against your first dollar of income taxed at 15% and a tax deduction will actually reduce your taxable income which saves you money on your last dollar earned.

Fiscal Credits (Refundable and Non-Refundable)

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 amount of taxes cut by the stated tax credit, which is 15%.

For instance, you are now qualified for a $5,000 tax credit. The amount equal to $750 is 15% of $5,000. So, your federal income tax obligation that year will be reduced by $750.

Additionally, there are 2 other 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 back the 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, etc. are a few examples of refundable tax credits.

Tax Deductions

In contrast, a tax deduction lowers your taxable income. The RRSP is one of the most prevalent types of tax deductions (Registered Retirement Savings Plan). For instance, more of your RRSP contributions will be subtracted from your taxable income at tax time.

Your taxable income will be determined once all tax deductions have been removed from your total income.

Tax Deductions By Type:

RRSP – As previously noted, you can use your RRSP contributions to lower your income tax obligations.

RPP – Any payments you make through your employer to a registered pension plan can be utilised to lower your taxable income.

Premiums for employment insurance – If a portion of your income is used to pay for an employment insurance plan, you can deduct the premiums from your taxes.

Contributions to the CPP – Contributions to the Canada Pension Plan (CPP) are also deductible from income.

Child Care – You can also write off some costs associated with child care.

Work from Home – By deducting home office expenses, you can lower your taxable income. The government has announced a new technique to write off your home office expenses called the “temporary flat rate approach” as a result of COVID-19.

Business Expenses – If you work for yourself, you can deduct some business expenses from your gross income. Advertising, office supplies, bank fees, and home office costs are all considered business expenses.

How to Apply for Tax Credits

The process for claiming a tax credit is the same as the process for claiming a tax deduction. Your tax software will ask you a number of questions as you complete your tax return in order to evaluate whether you qualify for any federal or provincial tax credits. You shouldn’t attempt to claim any credits that you are not qualified to claim because the government knows what credits you qualify for depending on your income. Tax credits reduce the amount of income tax you owe the government, which is the main distinction between tax credits and tax deductions. Your overall taxable income was less due to a tax deduction. Your time is valuable, see how we can help you keep it with a free consultation here.

Various Tax Credits

GST/HST Tax Credit: In Canada, low-income families and individuals can receive a tax-free payment from the GST/HST tax credit.

The Ontario Trillium Benefit (OTB) is a refundable tax credit available to low-income residents of Ontario.

The Northern Ontario Energy Credit (NOEC), the Ontario Energy and Property Tax Credit (OEPTC), and the Ontario Sales Tax Credit are combined into one credit (OSTC).

The Canada Worker Benefit (CWB) is an additional refundable tax credit for low-income families and individuals.

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. The ones that will, however, have the biggest impact on your bank account depend on how much money you typically make each year. Whatever your income, it will always be advantageous for you to begin considering and filing for those tax credits and deductions as soon as you can. Without a doubt, avoid waiting until the last minute. You can at the very least make monthly contributions to your RRSP in order to get a simple tax deduction. Once you have a bit more knowledge, you may start claiming all of the tax credits and deductions available and maximise your tax return.

Contact one of our Medtax.ca consultants to see how they can help if you have any questions about tax credits and deductions or want to develop a plan for you to take control of your money right away!

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