As Canadians, we’re all looking for ways to reduce our tax burden and keep more of our hard-earned money in our pockets.One of the most effective ways to achieve this goal is by taking advantage of tax credits. In this blog post, we’ll explore the role of tax credits in reducing your personal tax burden and discuss some of the most common tax credits available to Canadian taxpayers.
Difference between Tax Credits and Deductions
Before diving into tax credits, it’s important to understand the difference between tax credits and deductions.
Tax credits are amounts that directly reduce your tax liability, whereas tax deductions lower your taxable income, which indirectly reduces your tax liability. In essence, tax credits offer a dollar-for-dollar reduction in the taxes you owe, while tax deductions reduce the income that is subject to tax.
Understanding Tax Credits
Tax credits directly reduce the amount of tax you owe to the government. They come in two forms:
- Non-refundable tax credits: Non-refundable tax credits reduce your tax liability, but if the credit exceeds your liability, you won’t receive a refund for the difference.
- Refundable tax credits: Refundable tax credits, on the other hand, can result in a tax refund if the credit exceeds your tax liability [1].
While this is by no means a complete list, given below are some common Tax Credits that apply to most Canadians:
- The BPA is a non-refundable tax credit that reduces your taxable income.
- For the 2022 tax year, the federal BPA is $14,398.
- Provincial and territorial BPAs also exist, with amounts varying by jurisdiction.
- The BPA ensures that Canadians with income below the threshold do not pay federal income tax.
| Year | Maximum BPA | Minimum BPA | Additional BPA |
| 2021 | $13,808 | $12,421 | $1,387 |
| 2022 | $14,398 | $12,719 | $1,679 |
| 2023 | $15,000 | $13,521 | $1,479 |
Example: If your taxable income is $30,000, and the federal BPA is $14,398, your taxable income is reduced to $15,602 ($30,000 – $14,398).
- The CWB is a refundable tax credit designed to supplement the income of low-income workers.
- It encourages workforce participation by offsetting the financial burden of taxes.
- The maximum CWB amount for the 2022 tax year is $1,395 for single individuals and $2,403 for families.
- The CWB is gradually phased out as your income increases, with phase-out thresholds varying based on your marital status and province of residence.
- The METC is a non-refundable tax credit that helps offset eligible medical expenses.
- Expenses must exceed the lesser of 3% of your net income or $2,479 for the 2022 tax year.
- A wide range of medical expenses can be claimed, including prescription medications, dental services, and assistive devices.
- The CRA provides a comprehensive list of eligible medical expenses.
Example: If your net income is $50,000 and you have $3,000 in eligible medical expenses, you can claim $1,500 for the METC ($3,000 – $1,500, which is 3% of your net income).
- The DTC is a non-refundable tax credit that supports individuals with disabilities and their caregivers.
- To qualify, a medical practitioner must certify that you have a severe and prolonged impairment.
- The federal DTC amount for the 2022 tax year is $8,662, with an additional supplement of $5,053 for individuals under 18 years of age.
- Provincial and territorial disability tax credits may also be available.
- The Tuition Tax Credit is a non-refundable credit for eligible tuition fees paid to post-secondary institutions.
- Both full-time and part-time students can claim this credit.
- Unused amounts can be carried forward indefinitely or transferred to a spouse, common-law partner, or parent/grandparent.
- Note that the education and textbook tax credits were eliminated in 2017, but the tuition tax credit remains available.
- The Charitable Donations Tax Credit is a non-refundable credit for donations made to registered charities.
- You can claim donations made in the current tax year. You can also claim any unclaimed donations made in the previous five years.
- The credit rate is 15% on the first $200 of donations and 29% on amounts above $200 [9].
- Donations exceeding $200 made to certain cultural or ecological gifts may qualify for a 33% tax credit rate.
Example: If you donate $500 to a registered charity, you can claim a tax credit of $117 (($200 x 0.15) + ($300 x 0.29)).
The child care expense deduction allows parents to claim child care expenses for children under 16 years of age. Eligible expenses include daycare, day camps, and after-school programs.
Strategies to Minimize Tax Liability
Now that we have a clear understanding of the difference between tax credits and deductions, and have listed some of the main tax credits, let’s discuss some effective strategies and best practices to reduce your tax liability.
- Contribute to a Registered Retirement Savings Plan (RRSP)
- RRSP contributions are tax-deductible, which can lower your taxable income and result in tax savings.
- The funds in your RRSP grow tax-free until you withdraw them, typically during retirement when you may be in a lower tax bracket.
- The deadline for RRSP contributions is 60 days after the end of the tax year.
- Claim Childcare Expenses
- If you have children, consider claiming childcare expenses, which can lead to a significant tax deduction.
- Eligible expenses include daycare fees, babysitters, and day camps.
- The deduction limit depends on the age of the child and other factors.
- Utilize Income Splitting Strategies
- Income splitting strategies involve transferring income from a high-income family member to a family member having a lower income level, thus reducing the overall family tax burden.
- Some income splitting strategies include spousal RRSP contributions, prescribed rate loans, and pension income splitting.
- Keep Accurate Records of Your Expenses
- Maintain detailed records of your expenses, particularly those that may qualify for tax credits or deductions.
- Proper documentation can help you maximize your tax savings and prevent potential disputes with the CRA.
- Consult a Tax Professional
- Engaging the services of a tax professional can help you navigate the complexities of the tax system and ensure you take advantage of all available tax credits and deductions.
- Tax professionals stay up-to-date with changing tax laws and can provide personalized advice based on your unique financial situation.
In conclusion, understanding the difference between tax credits and deductions, as well as implementing effective tax-saving strategies, can play a significant role in reducing your overall tax liability. Be proactive in managing your tax situation and seek professional advice when needed to make the most of your tax-saving opportunities.
At Taxvisors, we pride ourselves on being your friendly neighborhood financial ally, catering to the diverse needs of individuals across Mississauga and the Greater Toronto Area for over two decades. Our personalized approach to accounting, bookkeeping, and tax services ensures that you’ll always be in good hands. Whether you’re a seasoned professional or just starting out, we’ll take the time to understand your unique financial goals and provide you with the expert guidance you need to thrive.