What is the difference between a tax credit and a tax deduction in Canada?

When determining the benefit of a tax deduction vs tax credit, it’s essential to understand the difference between the two. Let’s define each:

What is a Tax Credit?

A tax credit is a dollar-for-dollar reduction of the income tax owed.  A tax credit directly decreases the amount of tax you owe . Common credits include the Earned Income Credit, American Opportunity Tax Credit, and the Savers Tax Credit.

A credit can be nonrefundable or refundable. A nonrefundable credit lets you reduce your tax liability to zero (0). A refundable credit can also reduce your liability to zero (0) but there is an added benefit. If there’s any amount leftover from your refundable credit after reducing your tax to zero, you get the balance of the credit back as a refund. The Earned Income Tax Credit (EITC) is an example of a refundable credit.

What is a Tax Deduction?

Tax deduction lowers a person’s tax liability by reducing their taxable income Because a deduction lowers your taxable income, it lowers the amount of tax you owe, but by decreasing your taxable income — not by directly lowering your tax. The benefit of a tax deduction depends on your tax rate. Here are some commonly overlooked tax deductions.

Deductions and credits can be limited by your income so choosing one over the other can be tricky, A tax professional can help you sort through the complexity and choose whether to claim a credit, deduction, or both if eligible.

The Difference Between Tax Credit and Tax Deduction – An Example

Say, for example, that you or one of your dependents is in college. There are several options to get a credit or a deduction for tuition paid.

Tuition of $10,000 can reduce your total tax up to $2,500 using the American opportunity credit, which can reduce your total taxes due up to $2,500. The American opportunity credit is partially refundable, so even if you don’t owe any tax, you could receive a refund of up to $1,000.

Another credit option for education expenses is the lifetime learning credit. This credit can result in a reduction in tax up to $2,000. The lifetime learning credit is nonrefundable, so if you don’t have any taxable income or your tax liability is reduced to zero, it would not create a refund.

Taxpayers could also choose the tuition and fees deduction, which can reduce your taxable income by up to $4,000. If you’re in the 22% tax bracket, a $4,000 deduction lowers your taxes by $880. A deduction can only lower your taxable income and the tax rate that is used to calculate your tax. This can result in a larger refund of your withholding. A credit reduces your tax giving you a larger refund of your withholding, but certain tax credits can give you a refund even if you have no withholding.

You can choose any of the options you qualify for. The best one for you depends on your overall tax situation.

Get More Help

If you’re looking for more hands-on guidance, H&R Block can help. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you get back the most money possible.

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Credits Dependents Personal tax planning Filing online

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In Canada, tax credits and deductions are expenses you can claim on your income tax return. But do you know the difference between a tax credit and a tax deduction? Keep reading to learn more about how tax credits and deductions work, and how you can claim these expenses on your next CRA tax return.

What is a tax deduction?

Tax deductions are allowable expenses you can claim to reduce your taxable income. This means that if you made $60,000 last year, but had $5,000 worth of expenses, your taxable income would be $55,000, and you would only have to pay tax on that amount.  Your deductions need to be approved by the CRA. Some examples of allowable business expenses include:

 
• Contributions to a Registered Pension Plan (RPP) or Registered Retirement Savings Plan (RRSP);
 
• Annual union or professional dues;
 
• Expenses a disabled person might pay to go to school or earn income;
 
• Child care expenses (for children under the age of 16);
 
• Certain business losses, including capital losses on the sale of shares;
 
• Moving expenses (if you had to move more than 40 km for a job);
 
• Support payments to a child, spouse or common-law partner as a result of a court order;
 
• Interest and fees required for investments (does not apply to student loans or RRSPs);
 
• If you are self-employed, 50% of any amount paid into the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).

If you are a freelancer or small business owner, you may also be able to claim additional expenses such as business start-up costs, office supplies, mileage, and vehicle expenses.  Please note that in order to claim these deductions, you must have receipts to back them up. You don't need to send them in with your tax return, but you should keep all receipts for six years. This will protect you in the event of an audit.

What is a tax credit?

Once your deductions have been calculated, you'll be left with your taxable income. But, you can still reduce the taxes you'll pay on that amount. This is where tax credits come in. They are used to reduce your income tax even further.

Non-refundable tax credits

Non-refundable tax credits help you reduce any taxes you owe. However, they won't help you increase your tax refund.  One example of a non-refundable tax credit is the personal amount. Other examples include charitable donations, and the spouse/common-law partner credit.

Refundable tax credits

Refundable tax credits also reduce what you owe on your taxes, but unlike non-refundable tax credits, they can help you get a better tax return. This means that even if you have no income tax owing, a refundable tax credit can put additional money in your pocket.  Examples of refundable tax credits in Canada include but are not limited to:

How to claim a tax credit

Whether you are claiming a tax credit or a tax deduction, it helps to know where to look. Luckily, the CRA has prepared a list of all deductions, credits and expenses you can claim on your taxes, along with the line number you will need to use to do so.  To learn more about how you can get the most out of your CRA tax return, consider reading some of our CRA tax planning tips.

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