Tax Credits and Tax Deductions: What’s the difference? And why should you care?
The vocabulary around Canadian income tax can be quite confusing, and as a result some people just tune out. We hope you won’t do that, as knowledge is power (to use an old saying!).
A tax deduction is a payment that you can report on your income tax return to reduce the amount of income that is subject to income tax. Some examples are RRSP or pension contributions, moving expenses, childcare expenses, and union dues. They are subtracted from your total income, to determine the amount of net income that is taxable.
A tax credit is an amount calculated to reduce the amount of tax after the applicable federal and provincial tax rates are applied to your taxable income. Some credits are “refundable” such as Climate Action Incentive, Canada Workers Benefit, or Eligible Educator School Supply Credit; some are “non-refundable”, such as the basic personal amount, medical expenses, donations, tuition, home buyers amount or home accessibility expenses. Non-refundable credits, as the name suggests, do not result in a refund if your tax is otherwise zero. If you had income tax withheld at source, a non-refundable credit can help get a refund but only up to the amount that you had withheld. A refundable credit can be paid to you even if you got a refund of some or all of your withholding tax, or you owed no tax at all.
Quick example:
If you have $25,000 of income, and $5,000 of childcare expenses as a deduction, you will have $20,000 of net taxable income.
If the combined federal and provincial tax rate is 20%, your tax owing would be $4,000 (20% of $20,000).
Then there are personal credits to be deducted. In this simple example, the only credit you have is the personal credit, a federal credit amount is calculated, and a provincial credit amount is calculated, the combined credit being approximately $2,500.
If you have tax owing of $4,000 the credit of $2,500 is subtracted leaving you with income tax of $1,500. If your employer withheld $1,600 in income tax, you would get a refund of $100.
If your employer only withheld $1,000 you would have to pay the remaining $500 when you file your tax return.
Tax planning can help reduce the amount of taxable income, increase your deductions, and increase your credits, depending on your individual circumstances.
We will be reviewing next why we pay income tax.
We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website anytime at www.actionfinancialgroup.com.
Karin Rimnyak, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
David Dryburgh, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
Ian Barrie, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
