Have you ever wondered what the difference is between a a Tax Deduction and a Tax Credit? Although both can save you money on your taxes they work in different ways.
A tax deduction reduces the amount of income you have that is subject to income tax. A tax credit reduces the amount of tax that you owe.
A tax deduction may reduce the tax bracket that you land in thereby reducing the rate of tax that you have to pay. The best example of a tax deduction is your RRSP contribution which reduces your income and can possibly land you in a lower tax bracket. So it is important to know that tax deductions are dependent on your tax bracket. (to see what your tax bracket is visit the CRA website.)
A tax credit is a benefit that is applied to the taxpayer who is approved for it. All taxpayers receive the same amount regardless of their tax bracket. To make it more confusing there are two types of tax credits:
Non Refundable Tax Credits which will help to reduce the amount of taxes you owe unless your total tax credits are greater than the tax that you owe. In that case you will not receive the difference back on your tax return. Examples of non-refundable tax credits you can claim include: medical expenses, public transit passes and charitable donations.
Refundable Tax Credits also reduce the amount of tax that you will have to pay. However if you claim them on your return your will receive any excess credit due over and above the amount of tax that you have to pay. Refundable tax credits include: GST credits, the Working Income Tax Benefit, and the Children's Fitness Tax Credit.
In Canada there are numerous federal and provincial tax deductions and credits that you can apply for that can result in a tax refund for you. If you are not sure which deductions and credits you are entitled to claim it is best to get professional advice.
From an article by Bryan Daly and Caitlin Wood
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