Canadian taxpayers have until April 30th 2018 to file their 2017 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 $202,800, 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 earn $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.
Your RRSP contribution is an example of a tax deduction.
Tax Deductions checklist:
- 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 was an example of a non-refundable tax credit. You received a 15 percent credit for the amount you pay for transit passes. Unfortunately, this tax credit was eliminated in the 2017 federal budget and so for the 2017 tax year you can only claim public transit amounts you paid up until the end of June 2017.
Tax Credits checklist:
- Public transit receipts from Jan 1 to Jun 30, 2017
- 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
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 is first multiplied by 15 percent. That means a $5,000 non-refundable tax credit would only result in about $750 in tax savings.
A recent TurboTax article revealed the most overlooked tax credits and deductions, highlighting medical expenses, union dues, moving expenses, student loan interest, childcare expenses, and employment expenses as the ones most likely to go unclaimed.
That’s why it’s important that Canadian tax filers make a checklist of every deduction and credit available to them at tax-time and take advantage of all that apply to their situation.