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Differences in Non-Refundable Tax Credits and Tax Deductions

This is a pretty common question asked during tax season.  What exactly is the difference between a non-refundable tax credit and a tax deduction?

Tax Deduction

A tax deduction reduces your income for the year which can potentially mean that you've over paid on your taxes.  Come tax return season, you'll get a refund on your over paid amount. 

A common tax deduction for Canadians is an RRSP contribution.  An accurate way to calculate your tax return based on your contribution is through a tax calculator available online. However, if you want a quick (and approximate) way to calculate the tax return based on a tax deduction, simply multiply the tax deductible amount by your marginal rate.

If you are curious, you can check out your marginal rate here

If you own a business, a tax deduction is the same idea but it works a little differently. As an employee, you make money, get taxed, then the rest goes to your bank account.  As a business, you make money, subtract your tax deductions, THEN pay taxes on the net amount. 

This is a little off topic, but businesses have BIG tax advantages over employees as they have numerous tax deductible expenses where employees have few.  

A side tip:  If you make regular RRSP contributions, get your employer to reduce your bi-weekly tax payments.  Remember that if you're getting a big tax refund at the end of the year, the money was basically an interest free loan to the government. 

Non-Refundable Tax Credits

Instead of reducing your taxable income, non refundable tax credits reduce your taxes owing.  You will not get extra money back if you have more tax credits than taxes owing.

Tax credits give you an amount equal to:  amount claimed  x lowest federal rate (15% for 2008).  Where it gets confusing is that provinces will match the federal rate with their own lowest marginal rate on some tax credits (ie. the donation tax credit).  Other credits, like the transit tax credit, is a federal program only.

For example, say you spent $1000 in a year on public transit.  If the public transit is eligible for the tax credit, you would get back $1000 x 15% = $150.    

Final Thoughts

Which is better a tax credit or a tax deduction?  If you are anywhere higher than the lowest tax bracket, you'll get better benefit with a tax deduction.  But then again, we don't get to choose whether a tax write off is a tax credit or deduction.

Note that I'm not a qualified tax advisor, so please do your own due diligence. 

photo credit: blmurch

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 27 comments… add one }
  • Michael James March 27, 2008, 12:05 pm

    Related to your tax tip, one year I got my employer to reduce my payroll income taxes because I had made an RRSP contribution. The payroll people looked at me like I had two heads when I first mentioned it. I had to investigate myself until I found the right form. I think it was a T1213. Your readers might benefit from the following link to this form: http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html

    When I brought my filled out form to the payroll people, they processed it like it was something they did every day.

  • FrugalTrader March 27, 2008, 1:18 pm

    Great tip Michael. I had the same experience with the HR crowd here also.

  • Big Cajun Man March 27, 2008, 9:55 pm

    Indeed, it’s important if you are married to ensure that your employer makes those deductions as well.

    My wife works sporadically, so some years I get the full benefit of her not working, and then some others I don’t, but when she is not working, I do make sure I fill in the forms (for that same company) are filled in.

    –C8j

  • WhereDoesAllMyMoneyGo.com March 27, 2008, 10:39 pm

    If you are starting with a new employer I believe you can get away with just a TD1 form, but if you have started on payroll, you will indeed have to fill out the T1213 – although my understanding was that it gets sent to the local tax office who then instructs your payroll department to withhold less.

  • Mr. T March 28, 2008, 12:49 pm

    I am enrolled in a group RRSP with my employer. The employer matches 100% up to 6% of my Salary.

    Can I claim the amount that my employer contributed for RRSP Deduction? Or can I only claim the amount that I contributed?

    Thanks

    • FrugalTrader March 28, 2008, 4:15 pm

      Mr. T, your RRSP company will send you a tax receipt at the end of the year. Whatever is on that receipt is what you can claim.

      Hope that helps.

  • PB March 28, 2008, 3:47 pm

    Michael James: The T1213 form asks to give “details” or a copy of the “payment contract” when claiming a contribution to a self-directed RRSP. How much detail, paperwork, statements, etc. did you have to provide to satisfy the requirement?

    I’m filling out the form myself, but am stuck on this step.

  • Michael James March 28, 2008, 4:11 pm

    PB:

    I had an RRSP contribution tax receipt the time I used the T1213 form. My employer’s HR group said that was good enough. I would think that your best bet is to ask your HR group or ask whoever at the government this form will be sent to. My HR group handled the sending to the government for me.

  • PB March 28, 2008, 5:16 pm

    Michael James: I was trying to fill out this form to notify the CRA that I PLAN to make a certain amount of RRSP contribution in the future. I have made one contribution already, however, I contribute to my RRSP manually with bill payments every month (I use Questrade, and I dont think they support a pre-authorized deposit plan).

    Since I don’t have a formal “payment contract”, whats the chance that I will be granted my letter of authority? From the CRA’s point of view, they have to “trust” that I will make all the RRSP contributions I am claiming.

    Does anyone else have any experience with this?

    The only real documentation I could provide is my written promise :)

  • Mr. T March 29, 2008, 10:32 am

    Thanks FT

  • Gates VP May 11, 2008, 3:14 am

    Hey FT, my personal “mnemonic” for this one is “off the top” (tax deduction) and “off the bottom” (tax credit).

    The valuable deductions (like RRSPs) come “off the top” and the less valuable ones (like Transit pass savings) come “off the bottom”. Might now work for everybody, but it’s enough to help my wife understand.

  • Kevin November 23, 2008, 2:48 am

    Just a question and I’m not too sure if it relates to this post but here it goes.

    I have a few rental properties that bring in roughly $10,000 per month with mortgage payments and other deductions of roughly $7000.00 per month which makes my net income $3000.00 per month.

    Am I able to pay my expenses including property management, utilities and mortgage payments with a line of credit and further write off the interest for carrying these charges until an undisclosed date, potentially building them into the mortgage of the property by re-financing and gradually pay it off with the future rental income.

    My reasoning for this question is that I would like to take the full $10,000 monthly and apply it to my personal residence where the interest is not tax deductable and pay it off as soon as possible. Once it is paid off I will then focus on paying off the monthly expenses related to my rental properties that acrued during this time by using the future rental income from these properties.

    I know that I will be paying compounded interest on the deferred expenses and it will lower my future revenue, plus as I pay off the principle of this loan it will also be considered income, but this will benefit me both in lower capital gains tax because I am making less income based on more interest being paid and it will convert my bad debt into good debt.

    I hope I explained this properly so that everyone reading this understands what I am saying and can potentially answer my question.

    Based on the info I am giving I would also like to know that if this is possible for me to do, I am also assuming that my net monthly income during this time of defering my expenses will still be $3000.00 per month as I am able to deduct the expenses immediately this year even though I am deferring paying them until potentially next year.

    Please get back to me and let me know if I am dreaming here.

    thank you

  • FT FrugalTrader November 23, 2008, 7:15 am

    Kevin, from reading your comment, is your goal to pay down your principle residence mortgage faster? If so, you can perform what’s call the Cash Flow Damn, or cash damming. It’s basically where you use a line of credit to pay your rental expenses, while taking the extra income (since expenses are paid) to pay down your principle mortgage. I have an article on this tomorrow, stay tuned!

  • Kevin November 23, 2008, 7:10 pm

    Thank you Frugal Trader, that is exactly what I would like to do. I will look on your site tomorrow to find the article. If possible please send me a message to let me know once it is written.

    Take care

  • pardeep March 12, 2009, 2:53 pm

    Hi i am an international student i got married last year i.e my tax year. My wife worked in 2008. But earned was than $3600. My earning is more than $12000 for 2008.how much i can claim from my wife’s income for federal and provinical. .

  • Ray March 12, 2009, 3:58 pm

    at your tax levels you probably wont be owing any taxes, you are about $3000 in the lowest tax bracket, she wont have any taxes owing for her income.

  • unknown February 5, 2010, 5:11 am

    ” If you are anywhere higher than the lowest tax bracket, you’ll get better benefit with a tax deduction. ”

    I think it should be if your marginal tax rate is positive, people should choose tax credit over tax deduction. Tax deduction is only dollar for dollar reduction in the taxble income, while tax credit is a dollar for dollar reduction in the tax payables.

  • Denis Silverman March 8, 2010, 6:40 pm

    If someone has no income for the current tax year and, therefore, cannot use a non-refundable tax credit such as the $10320.00 personal exemption, can such credits be carried forward and utilized in a later year when you might have a high income, or can they only be utilized for the current year?

    Thank you.

    • FT FrugalTrader March 8, 2010, 8:17 pm

      Denis, to my knowledge, basic personal amounts cannot be carried forward to future years.

  • Brian May 3, 2012, 11:06 pm

    I had a child this year and after my accountant filed my taxes someone told me about a Non-Refundable tax credit for having dependents. I checked to see if my accountant claimed it, and he did. He claimed it for me and not for my spouse, even though was getting a return of over 5000$ and my spouse had to pay about 1100$. He said it was because I was in a higher tax bracket, so it was more beneficial to claim it for me than for her. Would it not have been better for him to claim it for her, since she owed money? Or is my understanding of non-refundable tax credit wrong?

  • Ed Rempel May 4, 2012, 12:40 am

    Hi Brian,

    Tax credits provide the same tax savings to either one of you, so it probably does not matter which one of you it was claimed on. Tax deductions provide larger savings to people with higher income, but tax credits usually provide the same benefit to either of you. What your accountant told you is probably wrong, unless your wife did not pay any tax.

    If her income was so low that she could not benefit from all of the tax credit, then it is better for you to claim it. This is because it is “non-refundable”, which means you can use it only to bring your tax for the year to zero, not below zero to get a refund.

    You should not focus on whether you or your wife is getting a refund or paying tax with your return. The refund or amount owing is just a difference between the amount of tax your employer deducted and the amount you actually owe. Even though you are getting a refund, it sounds like you paid a lot more tax for the year than your wife.

    Ed

  • Brian May 4, 2012, 10:16 am

    Thanks a lot, Ed. That answers my question. It’s logical that it depends on the total amount of tax that you owe for the year, whether or not you’ve already paid it… I just wanted to make sure.

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