What are Tax Credits vs. Tax Deductions?
It’s easy to get these confused because they seem like the same thing; however, their impact is quite significantly different.
A tax credit is a deduction from taxes owing and is calculated based on rates that are set by the government. For example, everyone is entitled to a “basic personal credit” of $11,474 (for 2016). At a rate of 15%, the credit is valued at $1,721.
A tax deduction is a direct reduction from your taxable income. The amount of tax that you save depends on your personal marginal tax rate.
For example, child care expenses are deducted directly from your income when calculating net income for tax purposes. If you had gross income of $15,000 and a deduction for child care expenses of $1,000, then your taxable income has been reduced directly to $14,000 ($15,000 - $1,000).
At a 15% marginal rate, taxes payable would be $2,100 ($14,000 x 15%).
Next, we can apply the basic personal credit of $1,721 from above, and taxes payable has been reduced to $379.
Note that this is a simplified example because there are other credits that you may qualify for. See below for a listing of available credits and deductions.
To add to the confusion, each province also sets their own rates for credits and taxes and may have additional credits available. In BC, the rates and credits approximate the federal rates and credits, with some differences.
A Summary of Available Tax Credits
Some tax credits available for 2016 include the following:
Age Amount – If you were 65 years or older and your net income is less than $83,427. You may also qualify for the Pension Income Amount, if you reported eligible pension or annuity payments.
Caregiver Amount – for taxpayers who provide care to an elderly relative living with them, such as your or your spouse’s parent or grandparent
Family Caregiver Amount – if you have a dependent with an impairment in physical or mental functions
Disability Amount for Self – you may be able to claim this if you are eligible for the disability tax credit
Amount for Eligible Dependent – you can claim this is you did not have a spouse or common-law partner and you supported a dependent during the year.
Amount for Infirm Dependants Age 18 or Older – the dependent can be your child, grandchild, parent, or grandparent, sibling, uncle, nephew, etc.
Children’s Arts Amount – up to $250 per child for eligible fees paid in 2016 for registration or membership of your child in a program of artistic, cultural, recreational, or development activity. This includes fees paid in 2016 for courses taken in 2017.
Children’s Fitness Tax Credit – up to $500 per child for eligible fees paid in 2016 for registration or membership of your child in a program of physical activity. This credit is eliminated for 2017 and later years.
Public Transit Amount – you can claim the cost of monthly or annual transit passes.
Eligible Educator School Supply Tax Credit – eligible educators can claim at 15% refundable tax credit based on an amount up to $1,000 of purchases of eligible teaching supplies. See also the related blog post: Teacher and Early Childhood Educator School Supply Tax Credit.
Volunteer Firefighters’ Amount – you can claim $3,000 if you completed at least 200 hours of eligible volunteer firefighting services, including being on call.
Home Buyer’s Amount – you can claim $5,000 if you or your spouse acquired a qualifying home and you did not live in another other home owned by you or your spouse in the year of acquisition or in any of the four preceding years. This means that if even if you had bought a home 5 years ago, you may qualify for this credit again if you have bought another home.
Tuition, Education, and Textbooks Amounts – 15% of amounts paid will reduce any income tax you owe. Up to $5,000 can also be transferred from your child or spouse.
Adoption Expenses – amounts related to the adoption of a child under 18 years of age. The maximum claim is $15,453 for each child.
Medical Expenses – you can claim medical expenses incurred in any 12-month period ending in 2016. For example, February 2015 to January 2016, if you did not claim them in 2015. You can even claim amounts that were not paid in Canada.
Donations – generally, you can claim all or part of donations made in the year, up to 75% of your net income. See also the blog post: Optimizing Your Donation Tax Credit.
The following is general information about tax deductions that you may be eligible for. Please contact us for more details.
Child Care Expenses – amounts that were paid to have someone look after an eligible child so that you could earn income or attend school. The child must have lived with you or the other person when the expense was incurred, and is claimed by the person with the lower net income.
Disability Supports Deduction – to support individuals who have an impairment in physical or mental functions and have paid for certain medical expenses
Moving Expenses – if you moved at least 40 km closer to your new work or school.
Interest Paid on your Student Loans – you can claim amounts paid for interest on your loan in 2016 or in the preceding five years, if you have not claimed it previously.
Get in touch with us to find out if you qualify for these tax credits, and more!