Difference Between a Tax Credit and a Tax Deduction

Marin Perez
Taxpayers reviewing their forms

In Canada, tax credits and deductions are expenses you can claim on your income tax return. But do you know the difference between a tax credit and a tax deduction? Keep reading to learn more about how tax credits and deductions work, and how you can claim these expenses on your next CRA tax return.

What is a tax deduction?

Tax deductions are allowable expenses you can claim to reduce your taxable income. This means that if you made $60,000 last year, but had $5,000 worth of expenses, your taxable income would be $55,000, and you would only have to pay tax on that amount.  Your deductions need to be approved by the CRA. Some examples of allowable business expenses include:

  • Contributions to a Registered Pension Plan (RPP) or Registered Retirement Savings Plan (RRSP);
  • Annual union or professional dues;
  • Expenses a disabled person might pay to go to school or earn income;
  • Child care expenses (for children under the age of 16);
  • Certain business losses, including capital losses on the sale of shares;
  • Moving expenses (if you had to move more than 40 km for a job);
  • Support payments to a child, spouse or common-law partner as a result of a court order;
  • Interest and fees required for investments (does not apply to student loans or RRSPs);
  • If you are self-employed, 50% of any amount paid into the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).

If you are a freelancer or small business owner, you may also be able to claim additional expenses such as business start-up costs, office supplies, mileage, and vehicle expenses.  Please note that in order to claim these deductions, you must have receipts to back them up. You don't need to send them in with your tax return, but you should keep all receipts for six years. This will protect you in the event of an audit.

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What is a tax credit?

Once your deductions have been calculated, you'll be left with your taxable income. But, you can still reduce the taxes you'll pay on that amount. This is where tax credits come in. They are used to reduce your income tax even further.

Non-refundable tax credits

Non-refundable tax credits help you reduce any taxes you owe. However, they won't help you increase your tax refund.  One example of a non-refundable tax credit is the personal amount. Other examples include charitable donations, and the spouse/common-law partner credit.

Refundable tax credits

Refundable tax credits also reduce what you owe on your taxes, but unlike non-refundable tax credits, they can help you get a better tax return. This means that even if you have no income tax owing, a refundable tax credit can put additional money in your pocket.  Examples of refundable tax credits in Canada include but are not limited to:

How to claim a tax credit

Whether you are claiming a tax credit or a tax deduction, it helps to know where to look. Luckily, the CRA has prepared a list of all deductions, credits and expenses you can claim on your taxes, along with the line number you will need to use to do so.  To learn more about how you can get the most out of your CRA tax return, consider reading some of our CRA tax planning tips.