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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