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Personal Tax Credit vs. Tax Deductions

The terms tax credits and tax deductions are often used interchangeably, but there is a difference. If you are going to take advantage of credits and deductions, it’s important to know what the difference is.

Tax Credits [1] directly reduce the amount of tax you pay while tax deductions reduce your taxable income.

Clear enough?

If you earned $125,000 last year and can deduct $10,000, your taxable income would be reduced to $115,000. If you lived in Ontario, your deduction would save you just over $4,000 in taxes. On the other hand, a $10,000 tax credit would only be worth $2,105.

The above seems to suggest that deductions are always better than tax credits, but not always: A tax credit and deduction would result in the same savings if you earned $35,000.

Non-Refundable Tax Credits

Many of the tax credits available are non-refundable tax credits. Non-refundable tax credits can only be used to reduce taxes payable to zero. They cannot be used to create a tax refund from the excess: That is, it can only be used to refund any tax you already paid.

Tax Credit Amount vs. Actual Tax Credit

There is a difference between the actual tax credit and the tax credit amount. The tax credit amount is what the actual tax credit is based on. The actual credit is a percentage of the credit amount expressed as the lowest tax rate.

Every Canadian is entitled to claim the Basic Personal Amount which is $10,320 for 2009. The actual federal tax credit is 15% of $10,320 or $1,548.

Provinces Have Tax Credits Also

Each province and territory has its own tax credit. Many are similar to the federal amounts but there are also some differences. Be sure you take a look at your provincial tax return to see what tax credit are available.