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

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.
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Brian
8 years ago

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.

Ed Rempel
8 years ago

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
8 years ago

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?

Denis Silverman
10 years ago

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.

unknown
11 years ago

” 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.

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Ray
11 years ago

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.

pardeep
11 years ago

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. .

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