Taxes
Difference Between a Tax Credit and a Tax Deduction
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.
