Canadian taxpayers have until April 30th, 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:
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 percent 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 percent and a deduction of $1,000 would only save you $150 in federal tax.
An example of a tax deduction is your RRSP contribution.
- 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
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 percent credit for the amount you pay for transit passes.
- 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.
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 percent.
A non-refundable tax credit, on the other hand, must be applied to any taxes owing and are first multiplied by 15 percent. 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.