In the Canadian Tax Act, tax deductions and tax credits serve different purposes in reducing an individual’s tax liability. Here’s how they differ:
Tax Deductions
- Reduce taxable income before tax is calculated.
- The savings depend on an individual’s marginal tax rate (the higher the income, the higher the savings).
- Examples:
- Registered Retirement Savings Plan (RRSP) contributions
- Child care expenses
- Union and professional dues
- Moving expenses
- Carrying charges on investments
Tax Credits
- Applied after taxable income is determined, directly reducing the tax payable.
- Calculated at the lowest tax rate in the province of residence, typically around 23%.
- Two types:
- Non-refundable credits: Can reduce tax to zero, but any excess is not refunded (e.g., basic personal amount, tuition credit, age amount).
- Refundable credits: If the credit exceeds tax owed, the difference is paid out as a refund (e.g., GST/HST credit, Canada Workers Benefit).
- Examples:
- Basic personal amount
- Disability tax credit
- Medical expenses credit
- Pension income amount
Key Difference
- Deductions lower taxable income, leading to higher tax savings for high-income earners.
- Credits provide equal tax relief regardless of income level, especially for lower-income individuals.
Would you like further clarification on specific deductions or credits?