How to Tax Credits and Deductions in Canada

Canada has developed a sophisticated and comprehensive tax system that can be confusing. Understanding both deductions and tax credits will assist in reducing your tax payments. The important thing to note is that both tax credits and tax deductions reduce taxable income or the amount of tax owed, but they do so in different ways. The explanation below illustrates the workings of tax credits and deductions so you can apply them to your benefit.

Deductions are the expenses that one subtracts from their income. Tax deductions reduce the amount of income that is subject to taxation. The more deductions you take, the lower your income will be, and the less taxes you owe. Deductions occur before your tax rate is calculated. From the start, you are taxed on less of your income.

A few examples of tax deductions include:

RRSP Contributions One of the more popular tax deductions in Canada is the Registered Retirement Saving Plan. Contribution to an RRSP or Registered Retirement Saving Plan is deducted from the income that is taxable. For example, if you have earned income of $60000 and contribute $5000 to a RRSP, your taxable income would go down to $55000.

Expenses associated with children’s care and development activities

Guardians and parents have the right to deduct childcare expenses which covers payments for nannies, daycare, and even after-school activities. The deduction would vary depending on the number of kids in the household and their respective ages.

Any interest that you incur on a Canada Student Loan can be claimed as a deduction. Please note, that this deduction applies to interest only and not the principal amount of the loan.

A non-refundable tax credit will eliminate the taxes that you owe, but will not provide you with a refund if the Canadian tax rates due is less than the credit. The maximum benefit is capped at the amount that is owed in tax.

Final Thoughts

By understanding how tax deductions and credits work, you’re in a better position to pay less on your Canadian taxes. While tax deductions decrease your income, tax credits reduce the tax amount that is owed, and both assist in managing taxes and finances. With adequate knowledge and all the resources available, one can be assured that they are not paying beyond their liabilities.