Tax Credits vs. Tax Deductions vs. Expenses: What's the Difference
Understand the differences between deductions, credits, and expenses—and how each can help reduce your client’s tax bill.
Tax Credits
Tax credits directly reduce the amount of tax you owe, dollar for dollar. They are categorized into:
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Non-Refundable Tax Credits: These can reduce your tax payable to zero but won't result in a refund if the credit exceeds your tax owed.
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Refundable Tax Credits: These can reduce your tax payable below zero, resulting in a refund.
Common Tax Credits
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Basic Personal Amount: A non-refundable credit that allows individuals to earn a certain amount tax-free.
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Disability Tax Credit: A non-refundable credit for individuals with a severe and prolonged impairment.
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Canada Workers Benefit: A refundable credit for low-income individuals or families who are in the workforce.
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GST/HST Credit: A refundable credit to offset the GST or HST paid by low- and modest-income individuals and families.
Tax Deductions
Tax deductions reduce the amount of your income that is subject to tax. By lowering your taxable income, deductions can lead to a decrease in the overall tax you owe. The actual savings depend on your marginal tax rate—the higher your income, the more you save per dollar deducted.
Common Tax Deductions
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Registered Retirement Savings Plan (RRSP) Contributions: Contributions to an RRSP are deductible, reducing your taxable income. This can be a strategic way to save for retirement while lowering your current tax bill.
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Child Care Expenses: If you incur child care costs to enable you or your spouse to work, attend school, or conduct research, these expenses may be deductible.
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Union or Professional Dues: Annual dues paid to maintain membership in a professional organization or union are deductible.
Expenses
Expenses are specific costs incurred that may qualify for tax deductions or credits, depending on their nature and eligibility criteria.
Example of Claimable Expenses
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Medical Expenses: Certain medical costs can be claimed as non-refundable tax credits.
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Education Expenses: Tuition fees may qualify for tax credits.
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Home Office Expenses: If you work from home, a portion of your home expenses may be deductible.
For a complete overview of personal income tax benefits, including deductions, credits, and claimable expenses, refer to the CRA’s official guide: