About once a week I get an email from someone asking about the difference between a deduction and credit on your tax return.
The media often mentions the benefits of any new tax incentives the federal government gives (like the family income splitting tax credit) but they rarely mention what exactly a credit is and how it’s different from a deduction.
Related: The Basics of Income Splitting
A deduction is also commonly called a “write-off” because it reduces the amount of income you will be taxed on. Provincial and federal tax rates vary but a deduction is worth more if your income is higher. This is because higher income amounts are taxed at higher rates.
A deduction could be worth 25% if your income is below $42,000 or 45% if your income is higher than $130,000. Essentially deductions are more valuable for higher income earners because they pay tax at a higher rate. A $100 deduction could be worth a tax savings of $45 for higher income earners.
Before making any deductions, make sure you seek professional advice on whether you are eligible to claim the deduction as they might be available in certain circumstances only.
A credit is a direct reduction in taxes payable and isn’t based on the income you earn. A $100 credit means your taxes owing will decrease by $100. The complicated part is that some credits are worth more to higher income earners because of the way surtaxes are charged on provincial taxes.
A higher income earner who pays surtax is better off claiming the credits for themselves rather than their spouse (if he/she has a lower income and doesn’t pay a surtax). This is why it is advantageous for the higher income spouse to claim all charitable donation tax credits if possible.
Here are some common credits you may be eligible to claim:
- Basic federal credit which allows you to offset your first $10,822 of income
- Eligible dependent credit if you support a family member and are single, widowed or divorced
- Spousal credit if your spouse’s income is under $10,822 (this also applies to common-law relationships)
- Child tax credit for parents with children under 18 years old
A non-refundable tax credit is a tax credit that can’t be used to reduce your income taxes to less than $0 and is used only against the amount of taxes you owe. A refundable tax credit are credits given (assuming you qualify for them) that aren’t based on how much taxes you owe.
As with everything in taxes, it is best to check with an advisor to see which credits you are eligible for and if any are applicable to your situation.
Related: The Ways We Overpay on Taxes