Canadian taxpayers have until May 1st, 2023 to file their 2022 taxes (April 30th falls on a Sunday). However, as 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 tax deduction and a tax credit? Let’s explore:
A tax deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $221,708, you’d be taxed at the federal rate of 33% and a $1,000 tax deduction would save you $330 in federal tax. On the other hand, if you earn less than $50,197, you’d be taxed at the federal rate of only 15% and a $1,000 tax deduction would only save you $150 in federal tax.
Two of the most valuable tax deductions are:
Your RRSP contribution is an example of a tax deduction, and is likely the best tax saving strategy available to the majority of Canadian taxpayers. The contribution reduces your net income, which in turn reduces your taxes owing. An added bonus for families who contribute to RRSPs is that the resulting lower net income will likely increase their Canada Child Benefit.
You have until 60 days of the current year to make a contribution to your RRSP and apply the deduction towards last year’s taxes. One tip for those who know in advance how much they’ll be contributing to their RRSP is to fill out the form T1213 – Request to Reduce Tax Deductions at Source.
You can contribute 18% of your income, up to a limit of $29,210 (2022). Watch out for RRSP over contributions – there’s a built-in safeguard where you can over contribute by $2,000. Excess contributions are taxed at a punitive 1% per month.
Day care is likely one of the largest expenses for young families today. Child-care expenses can be used as an eligible tax deduction on your tax return.
Typically, child-care expenses must be claimed by the lower income spouse. One exception is if the lower income spouse is enrolled in school and cannot provide child-care, the higher income spouse can claim the child-care costs.
The basic limit for child-care expenses are:
- $8,000 for each child under 7 years of age at the end of the year
- $5,000 for each child between 7 and 16 years of age
- $11,000 for each child who qualifies for the disability tax credit
Note that most overnight camps and summer day camps are also eligible for the child-care 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 owe just $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.
Three of the most valuable tax credits are:
Basic Personal Amount
The best example of a non-refundable tax credit is the basic personal amount, which every Canadian resident is entitled to claim on his or her tax return. The basic personal amount for 2022 is $14,398.
Instead of paying taxes on your entire income, you only pay taxes on the remaining income once the basic personal amount has been applied.
You can claim all or a portion of the spousal amount ($14,398) if you support your spouse or common-law partner, as long as his or her net income is less than $14,398. The amount is reduced by any net income earned by the spouse, and it can only be claimed by one person for their spouse or common-law partner.
The Age Amount tax credit is available to Canadians aged 65 or older (at the end of the tax year). The federal age amount for 2022 is $7,898. This amount is reduced by 15% of income exceeding a threshold amount of $39,826, and is eliminated when income exceeds $92,479.
The Age Amount tax credit is calculated using the lowest tax rate (15% federally), so the maximum federal tax credit is $1,184.70 for 2022 ($7,898 x 0.15).
Note that the age amount can be transferred to the spouse if the individual claiming this credit cannot utilize the entire amount before reducing his or her taxes to zero.
Tax Credits checklist:
- Work from home expenses
- 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 Verdict on Tax Deductions and Tax Credits:
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%.
A non-refundable tax credit, on the other hand, must be applied to any taxes owing and is first multiplied by 15%. That means a $5,000 non-refundable tax credit would only result in about $750 in tax savings.
The most overlooked tax credits and tax deductions (the ones most likely to go unclaimed) are medical expenses, union dues, moving expenses, student loan interest, childcare expenses, and employment expenses (including work from home expenses).
That’s why it’s important that Canadian tax filers make a checklist of every tax deduction and tax credit available to them at tax-time and take advantage of all that apply to their situation.