Tax Deductions and Tax Credits in Canada | Finder Canada (2023)

With Canada's tax season approaching, how can taxes owed be reduced? Fortunately, there are many ways to offset your tax debt. This guide provides a list of commonly used tax deductions and tax credits that can reduce the amount you owe on your taxes.

How to reduce the taxes you owe

You can reduce your overall tax burden with tax deductions and tax credits. A tax deduction is a reduction in taxable income. The lower your taxable income, the less tax you pay. A tax credit is a reduction in the taxes you owe. Tax credits are applied to your tax bill after your total taxes have been calculated. You can learn more about how to reduce your taxes through the tax deductions and tax credits listed below.

Note that there are other ways to keep your tax burden low through various tax benefits. For example controlling the tax bracket you are in, using TFSAs and RRSPs and so on. However, these strategies are beyond the scope of this article.

Tax Deductions in Canada

Below is a list of tax deductions with information on how to maximize each tax deduction:

1. RRSP Contributions

An enrolled retirement plan (RRP) allows Canadians to save for retirement and reduce the amount of tax they owe. The amount you contribute to your RRSP will be deducted from your taxable income, which means you pay less tax.

RRSP contributions can serve as intentional tax planning or immediate tax relief. Most Canadians who are earning a regular income open an RRSP and begin contributing funds for retirement. You may contribute to your RRSP for the first 60 days of the calendar year and apply those contributions to the previous tax year.

Open an RRSP with an online brokerage account

2. Child Care Costs

If you are a parent, you can deduct childcare costs from your income. In households with more than one parent, childcare costs usually have to be deducted from the parent with the lowest income. The basic limit for childcare costs is:

• Eligible children born in 2012 or later: $8,000
• Number of eligible children born between 2002 and 2011: $5,000

• An eligible child must be under the age of 16 at any time during the year. The age limit does not apply if the child has a disability or physical/mental functioning and is dependent. A qualifying child is defined as follows:

  • Your child or the child of your spouse or partner
  • A child dependent on you or your spouse or domestic partner whose 2020 net income was $13,229 or less

  Eligible childcare expenses are any expenses paid to another person to care for an eligible child that enable the parent to:

  • Earn income from employment
  • Run a business
  • To go to school
  • Pursue research or similar work for which a grant was awarded

  (Video) What Is A Tax Write Off - Canadian Tax Deductions Explained

3. Relocation expenses

If you moved for a new job or to go to school, you can deduct certain moving expenses. To be eligible, you must live at least 40 kilometers closer to your new place of work or study.

Eligible moving expenses include:

• Vehicle costs, accommodation and meals for you and your family
• Fees for changing addresses on documents, e.g. B. a driver's license
• Utility connection and disconnection costs
• Ownership transfer costs for your new property

4. Home office costs

Home office costs have always been tax deductible; However, the way it is used has changed since the pandemic. As millions of Canadians transitioned to a work-from-home environment, the CRA introduced a simplified way of calculating home office expenses. The earlier procedure, called the detailed procedure, is still available for use. Currently, taxpayers can choose either option if they are working from home and are employees. Let's explore both options below.

Detailed method

The detailed method applies to both employees who have to work from home and employees who have switched to remote work due to the pandemic. The detailed method requires the taxpayer to keep a record of the home office expenses they have incurred. This allows them to report the exact amount of expenses paid. Note that you must separate costs related to your personal and professional use.

To claim home office expenses on your tax return in this way, you must complete Form T2200S/T2200 and have your employer sign it.

• Eligible home office expenses include:

  • Utilities including electricity, heat and water
  • Home Internet
  • Maintenance and minor repairs
  • To rent
  • Household contents insurance (only commission employees)
  • Wealth taxes (Commission staff only)
  • Pay-related leasing costs of assets (only commission employees)

  Ineligible home office expenses include:

  • mortgage rates
  • mortgage payments
  • Fees for internet connection at home
  • Furniture
  • capital expenditures
  • wall decorations

Temporary flat rate method

The flat rate method is the new tax deduction introduced due to the pandemic and the shift to teleworking. To qualify, you must have worked from home at least 50% of the time for 4 consecutive weeks. You can claim $2 per day for each day worked up to a maximum of $400 (or 200 remote days). This method does not require you to complete Form T2200 or retain any documents.

Tax Credits in Canada

Tax credits reduce your tax liability after your amount owed has been calculated. In Canada, tax credits are either refundable or non-refundable. A refundable tax credit means you get the credit even if your tax liability is $0. A non-refundable tax credit will apply to your tax credit, but if you do not owe any tax, you will not benefit from a non-refundable tax credit.

Below is a list of commonly used non-refundable tax credits in Canada:

• Basic Personal.This tax credit is designed to protect people living below the poverty line. In other words, you can consider the first $12,000 of your income tax-free because of this tax credit. Every Canadian is eligible to claim the personal base amount. For 2021 the amount is $12,421 and in 2020 it was $12,298.
• Spouse or life partner amount.If you support your spouse or partner and their income was below the personal basic amount, you can claim this reduction.
• old amount.If you are older than 65 in the current tax year, you can claim this tax credit.
• Eligible family members and carers.If you support an eligible dependent and/or are a caregiver, there are various tax credits you may be able to claim.
• Canada employment amount.If you have declared income from work, you are entitled to this tax credit.
• Amount of home buyers.If you bought a home, you are eligible for this tax credit. A qualifying home is a property in Canada that is registered in your name or in the name of your spouse/partner.
• Education Tax Credits.Your study, education, and textbook amounts are eligible.
• Interest on student loans.If you paid interest on your student loans, you are eligible for this tax credit.
• disability amount.If you live with a disability and are eligible, you can claim this tax credit. There is an additional amount if you are under 18 years old.
• Medical Expenses.Certain medical expenses qualify for this tax credit.
• donations and gifts.If you have given money or other property to registered charities and institutions, you are entitled to this tax credit.

Helpful strategies for tax season

• keep receipts.In general, you should keep records of everything you earn and spend. When tax season starts, it becomes easier to do calculations and have documentation for credits and deductions. With a better understanding of the Canadian tax system, you will know what to save and what to throw away.
• Read the Annual Tax Guide.Each year, the CRA makes small adjustments to how Canadians are taxed. But overall, not much is changing in the Canadian tax system. Reading the annual tax guide each year will help you better understand the system and file your own taxes and tax planning.
• tax planning.If you're going to grad school soon, or if you're about to sell a large asset, plan your taxes accordingly. This can help you assess your debt and spot opportunities to reduce your liability earlier.
• Hire a professional.Complex tax issues may arise that may be too difficult for you to tackle on your own. If you need help, you should hire a professional. There are many who do tax returns for an affordable fee.

bottom line

Tax benefits like tax credits and tax deductions can help reduce your taxable income and the taxes you pay, as long as you know what's eligible. Every time you fill out a tax return, the better you can reduce your tax liability. If you ever get stuck in the process, consider hiring a tax professional to assist you.

frequently asked Questions

• In Canada, married couples are eligible for the Spouse Tax Credit. If the couple has children, they can also deduct childcare costs. In addition, depending on their child's circumstances, they may be entitled to additional tax credits. For example, if your child is dependent or is pursuing post-secondary education, they may be eligible for additional tax credits.

• If you're buying a home, you're eligible for a Homebuyer Tax Credit this year. If you have acquired a new home as a result of moving for employment or study purposes, you may also be able to deduct moving expenses.

• Before you can calculate tax deductions, you must first calculate your taxable income. This is done by determining and summing up all your income for the year. This can be labor income, business income, capital income, and so on.

  (Video) Tax Deductions vs. Tax Credits

  From there, you can start reducing your taxable income through tax deductions. There are many tax deductions available to you, but the most important are RRSP contributions, child care expenses, moving expenses, and home office expenses. Once all of these deductions have been made, you have your final taxable income amount.