What is the difference between tax deductions and tax credits?
TAX DEDUCTIONS reduce your taxable income. The value of the deduction depends on your marginal tax rate.
For example, a $5,000 federal tax deduction for an individual with $125,000 taxable income is worth $1,300 (5,000 x 26% applicable marginal rate). Common examples are RRSPs and childcare.
TAX CREDITS reduce the amount of tax owing. The value of the tax credit is based on a certain rate (usually the lowest tax bracket).
For example, a $5,000 federal tax credit at 15% is worth $750 (5,000 x 15%), regardless of taxable income. Common examples are personal, spousal, age, EI and CPP premiums.
Some credits are non-refundable and some are refundable:
- Non-refundable credits – can only be claimed if the tax owing is greater than the amount of the credits
- Refundable credits – can be received regardless of tax owing
Note: There are other credits that are calculated differently, such as donations, dividends, and foreign tax credits.
