Tax Credits & Deductions

You, and many other Canadians may be preparing to file your taxes for 2023 as the deadline for filing your taxes is weeks away.

If you haven't started yet, you still have time, but remember the deadline to file your taxes for the 2023 tax year is April 30, 2024 (or June 15, 2024 if you or your spouse or common-law partner are self-employed). In both scenarios, you will still need to pay your tax (if owing a balance) by April 30, 2024.

With that in mind, I'm sure you want to maximize your tax savings when filing your taxes. One way in which Canadians are able to reduce the tax they owe and have to pay each year is to take advantage of the various tax deductions and tax credits available.

Below I've summarized information on what a tax credit is and what a tax deduction is, the difference between them and how you can use them to maximize your tax savings.

What is a tax deduction?

A tax deduction reduces the amount of income that is subject to tax. This means that the deduction is applied to your taxable income, rather than directly reducing your tax bill like a tax credit. For example, if you have a tax deduction of $5,000 and your taxable income is $50,000, the deduction would reduce your taxable income to $45,000.

What is a tax credit?

On the other hand, a tax credit is a direct reduction in the amount of tax you owe. It is applied to the total amount of tax you owe, resulting in a dollar-for-dollar reduction in your tax bill. For example, if you have a tax credit of $500, this amount will be subtracted from your total tax liability, leading to a lower tax bill.

Example for illustrative purposes:

Actions:

• You earn total income of $50,000 this year from your employer as your only source of income.
• You contribute $5,000 into your RRSP.
• You donate $1000 to your preferred registered Canadian Charity.

Impact:

• Your income would be reduced from $50,000 down to $45,000 for the purposes of calculating your taxable income - because the $5,000 RRSP contribution is a deduction.
• If you did not make the RRSP contribution of $5,000, your estimated tax bill would be approximately $7,200 in Ontario. When your taxable income is reduced to $45,000 the estimated tax bill would be approximately $6,100 - which would reduce your tax bill by $1,100.
• The donation of $1,000 is not a deduction, but is a non-refundable tax credit for you on your taxes. Note that you do not get a tax credit of the amount you donate, as there is a formula to calculate the credit amount. In a simplified example, the first $200 of donations receive a credit of 15%, and the remainder receives a credit of 29% which equals a credit of $262 ($200 x 15% =$30 ) + ($800 x 29% =$232 ).
• The donation tax credit would then be able to reduce the tax bill previously calculated from $1,100 to $838 (using the $262 credit).

Overall, this example shows how two common actions impact your taxable income and taxes owing using an RRSP deduction and a donation tax-credit.

For a comprehensive list of all tax credits, deductions and expenses from the CRA, click here. Always speak with an Accountant/Tax Professional to ensure you are receiving the most accurate, and up to date advice pertaining to your specific tax situation.

?