Tax Deductions and Tax Credits: What's the Difference?

Canadian taxpayers have until April 30th 2020 to file their 2019 taxes. 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:

Tax Deductions

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 $210,371, you’d be taxed at the federal rate of 33 percent and a $1,000 tax deduction would save you $330 in federal tax. On the other hand, if you earn less than $47,630, you’d be taxed at the federal rate of only 15 percent and a $1,000 tax deduction would only save you $150 in federal tax.

Two of the most valuable tax deductions are:

RRSP contributions

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 percent of your income, up to a limit of $26,500 (2019). 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 1 percent per month.

Child-care expenses

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 children born in 2012 or later, and $5,000 for children born between 2002 and 2011. Parents can also claim $11,000 for a 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

Tax Credits:

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 2019 is $12,069.

Instead of paying taxes on your entire income, you only pay taxes on the remaining income once the basic personal amount has been applied. 

Spousal Amount

You can claim all or a portion of the spousal amount ($12,069) if you support your spouse or common-law partner, as long as his or her net income is less than $12,069. 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.

Age Amount

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 2019 is $7,494. This amount is reduced by 15 percent of income exceeding a threshold amount of $37,790, and is eliminated when income exceeds $87,750.

The Age Amount tax credit is calculated using the lowest tax rate (15 percent federally), so the maximum federal tax credit is $1,124 for 2019 ($7,494 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:

  • 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 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 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.

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.

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.

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6 Comments

  1. Tamir on January 16, 2020 at 7:33 am

    Hey Robb,
    Looking at the following statement:
    “The basic limit for child-care expenses are $8,000 for children born in 2012 or later, $11,000 for children born in 2018 or earlier”.
    I cannot find anything online with the CRA about being able to claim up to $11,000 for kids born in 2018 or earlier.
    Is this something new?
    I can find that Intuit’s website listed the $11,000 for disabled dependent kids.
    Can you provide a link to this?
    Thanks

    • Robb Engen on January 16, 2020 at 9:13 am

      Hi Tamir, wow – that was a terrible oversight on my part. The $11,000 deduction is only available for a child who qualifies for the disability tax credit. I’ve updated the article. Thanks!

  2. Toby Stewart on January 16, 2020 at 11:54 am

    Hi Robb — and belated Happy New Year out there in frigid Alberta!
    An off-topic question, but related to decisions as to what ETF or TD eFunds to buy with more contribution room in RRSPs and TFSAs:
    Can you send a link(s) to any “COMPARISION TOOLs” or SCREENERS
    which permit us to compare the characteristics of different holdings?
    I’ve tried TD’s DI Screener — which I found cumbersome, and it can’t save custom screens which I’ve created.
    I want something which can let me compare 4-5 similar ETFs side-by-side
    with data from each fund eg. income yield, MeR, price range, total/price returns, risk, Morningstar rating, etc.
    Thanks;
    Toby

  3. Joseph Sadovia on January 16, 2020 at 6:13 pm

    Hi Robb, I believe there is slight misinformation in the second paragraph under AGE AMOUNT where you show that the maximum federal tax credit for 2019 is $ 1,124 ( $ 7,494 X 15 %).
    The 15 % should be against the amount of income that is over the threshold. So if the taxable income were $ 51,000 and the threshold is $ 37,790, the excess would be $ 13, 210 . You would then multiply the excess $ 13,210 by 15 % = $ 1,981.50. The resulting maximum federal tax credit for the Age Amount for 2019 would then be $ 5,512.50 ( i.e. $ 7,494.00 minus $ 1,981.50 ).

    • Robb Engen on January 16, 2020 at 8:35 pm

      Hi Joseph, sorry if this wasn’t written very clear. In the section under Age Amount I’m making two separate points. One is that the amount is reduced by 15% of income exceeding the threshold.

      So, if you had income of $50,000 then you would have exceeded the threshold by $12,210. Multiply that by 15% to get $1,831.50. Then subtract that amount from the federal age amount of $7,494 and you get an age amount of $5,662.50.

      That’s the amount to use for your tax credit, so $5,662.50 x 15% = $849.38.

      The second point I made about the age amount is that it’s calculated using the lowest tax rate (15% federally), so the maximum federal tax credit is $1,124 ($7,494 x 15%).

      Clear as mud?

  4. Darby on January 20, 2020 at 2:43 pm

    I am interested in what you said was the exception for which spouse claims the child care costs. If a mother, who is on an 18 month maternity leave in Ontario and collecting EI benefits, attends school incurring child care costs while she is in class, can her spouse, the higher income earner, claim those child care expenses? Or does being on maternity preclude her from that option and make her claim those expenses?

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