Most taxpayers use the terms tax deduction and tax credit interchangeably. Since they’re not accountants, it’s perfectly fine if you’re not concerned with accuracy and seeking a greater understanding of taxes. And while there are many technicalities and tax jargon that are best left to the tax professionals, this particular distinction is fairly simple, can be helpful to understand, and may even save you some taxes.

So, what’s the difference? A tax deduction is a reduction in your net income on which your taxes payable is based, while a tax credit is a direct reduction in your taxes payable. They may sound very similar, but their impact on the amount of taxes you pay is different. Since there are different tax brackets, a tax deduction has the effect of reducing your taxes effectively due to the highest tax bracket to which your income applies, while a tax credit (for simplicity we are only talking about the federal part, not the provincial part) will reduce taxes by only 15%, which corresponds to the lowest tax bracket. Although it can be considerably more complicated, suffice it to say that if your income exceeds around $50,000, the tax deductions are worth more, i.e., they reduce your taxes by a greater amount than the tax credit, because a portion of the $50,000 will be taxed based on in a higher tax bracket.

Another difference is that tax credits can also be refundable or non-refundable. A nonrefundable tax credit is one that can only be used to reduce your taxes to $0, after which any remaining credit is lost. A refundable tax credit, on the other hand, will result in a tax refund if the amount of the credit exceeds your tax payable.

Talk to a personal tax accountant for accounting and tax services that can help you save significantly on your tax bill.
Since everyone now understands tax deductions, let’s discuss the most common ones:

The most popular and widely known tax deduction is contributions to Registered Retirement Savings, or as it is more commonly known RRSP.

It’s a good idea to start an RRSP, which can be done at most financial institutions, robo advisors, etc. as soon as possible. An RRSP allows you to accumulate investments on a tax-deferred basis. This means no taxes are paid until you reach age 71 or when you start withdrawing from your RRSP, whichever comes first.

Contributions to an RRSP are tax deductible. The value (i.e., tax reduction potential) of RRSP contributions increases as your income grows. As mentioned in our introduction, this is because tax deductions are a reduction of income in the highest tax bracket that applies to you. That’s why it’s sometimes beneficial to wait to contribute if you think your earning potential will be higher in a few years than it is now.

The amount you can contribute to your RRSP is limited to 18% of your earned income up to a maximum amount per year ($27,830 in 2021). Earned income includes income from employment and business but excludes interest, dividends, and rental income. Revenue Canada tells you the exact amount of your “contribution room” each year in your notice of assessment or you can find it in your CRA account online. You can contribute the full amount of your contribution over time or in one year, but you cannot exceed it. If you exceed your allowance, you will be charged penalties.

RRSPs are the most significant tax reduction vehicle available.

Amounts paid to another person or entity to care for your child can be claimed as childcare expenses, including:
1. Daily care
2. Nanny (must give you a receipt that includes full name, social security number, and amount paid per year)
3. Day camps or overnight camps
4. Boarding schools
5. Other expenses such as advertising or agency fees when finding a childcare provider. You can find a list of other expenses here.

Talk to a personal tax accountant for accounting and tax services that can help you save significantly on your tax bill.
With some exceptions, childcare expenses must be claimed by the spouse with the lowest income. If you are the only person supporting the child, then this rule does not apply. It should be noted that if one spouse has no income or does not go to school and is physically and mentally fit, then no deduction is allowed.

In order to claim childcare expenses, you and your spouse must either have an active income from employment, business, or a research grant. Alternatively, one or both of you must be attending school at a qualified educational institution.
At the federal level, there is no longer a tax credit available for sports or leisure activities.

If you have childcare expenses, you will likely receive a tax-deductible receipt that can simply be entered in the appropriate space on your tax return using your tax software. Most tax software automatically calculates and optimizes childcare expenses for the respective spouse.

While many deductions don’t apply to everyone, it’s good to know if and when they apply in the future. Even if you’re using an accountant to prepare your tax return, you need to disclose the details of your situation to ensure you maximize the deductions you’re entitled to and pay the lowest possible taxes. Talk to a personal tax accountant for accounting and tax services that can help you save significantly on your tax bill.

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