Posts Tagged ‘credit’

Tax Credits vs Tax Deductions – What’s the Difference?

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Although these two terms are used interchangeably, when you’re discussing tax credits and tax deductions you’re not comparing apples to apples. They are very different and knowing the differences is helpful.

Tax we owe in any given year is not based solely on our income but is also affected by the various tax dedications and tax credits we are entitled to for that year.

Tax Deductions – Reduce Taxable Income

Tax deductions reduce taxes differently depending on the marginal tax bracket you’re in. For example, if you are in the bottom marginal tax bracket and your marginal tax rate is 15%, then a $100 tax deduction will save you $15. However, let’s say you were in a higher marginal tax bracket and your marginal tax rate is 20%, then that same $100 tax deduction will save you $20 instead. Although tax deductions will generally benefit everyone, tax deductions are more effective in saving tax for those that make a higher income and are subject to higher tax rates.

Common tax deductions include:

  • RRSP Contributions
  • Childcare Expenses
  • Moving Expenses

Tax Credits – Directly Reduce Tax Liability Otherwise Calculated

Once your marginal tax rate is applied to your taxable income and the taxes owing is calculated, tax credits are applied in the final stage of this calculation to lower taxes owing even further. Tax credits differ from tax deductions because they reduce taxes independent of the marginal tax bracket you belong in. Tax credits are calculated using the bottom marginal tax rate. In other words, whether you have a taxable income of $30,000 or $200,000, a $100 tax credit will save you the same amount in taxes. Tax credits might bring your final tax owing to $Nil but are generally not going to create a tax refund.

Common tax credits include:

  • Medical Expenses
  • Charitable Donations
  • Post-secondary Tuition

Bottom line is, tax deductions will save more taxes than tax credits if you are in the higher marginal tax brackets. So remember, you aren’t deducting that medical expense, you’re claiming a non-refundable tax credit.

We hope this brief explanation of the differences between tax deductions and tax credits will help you better understand what’s going on inside your tax return. Please call us if you have any other questions or comments.

Registered Education Savings Plan (RESP): Withdrawals

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So, you did your homework and started a RESP for your child. Bravo! However, now junior is grown up and ready to go off to University – YIKES! Where did the time go? Certainly, time can seem as fleeting as our money. Below are some tips to ensure the RESP you so diligently cared for will yield the best results.

When can you start withdrawing from your child’s RESP?

Once a child is enrolled in a qualifying post secondary program, the RESP subscriber (usually a parent) can withdraw money on behalf of the child.

  • For full-time programs, withdrawals are limited to $5,000 for the first 13 weeks of enrollment. There are no limits on the amounts you can withdraw thereafter.
  • For part-time programs, withdrawals are limited to $2,500 for every 13-week period they are enrolled.

What are the tax implications of RESP withdrawals?

The RESP balance is made up of three different pools.

  • Contributions you make personally – Withdrawing from the contributions pool has no tax implications.
  • Government grants and investment income – Withdrawing from either of these pools can result is taxable income in the year they are withdrawn. We suggest ensuring your total annual withdrawals are made from these pools first until it results in the child having a high annual income. If more needs to be withdrawn in that year, consider drawing from the contributions pool. The flexibility around drawing from each of these pools varies between plans – so check with your plan administrator.

Plan to ensure the RESP account is fully withdrawn before the child graduates. There is a grace period of six months after graduation for the RESP to be fully withdrawn or transferred. Otherwise, there are penalties.

Ways to transfer the balance and avoid penalties

  • Transfer the taxable portions to your RRSP if you or your spouse have RRSP contribution room.
  • If you are in a RESP family plan, you can transfer the taxable portions to any siblings.
  • If you are eligible, you can also transfer it to a Registered Disability Savings Plan (RDSP). For this option, the beneficiary for the RESP and RDSP must be the same.

What are the penalties?

If the RESP is not fully withdrawn before the six-month deadline, any remaining government grant will have to be repaid to the government and any investment income becomes immediately taxable at your child’s marginal rate plus 20%. The contribution portion can still be withdrawn tax free even if the child has graduated. We suggest speaking with your financial institution about how you would like these funds handled ahead of time. Feel free to contact us if you have any other questions.

Disability Tax Credit – Are You Eligible?

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How do you know if you are eligible for the disability tax credit (DTC)?

CRA’s website has a tool available where you can review some questions in order to figure out whether you are eligible to apply for the Disability Tax Credit Certificate. If you want to go through the questionnaire yourself, click on this link.

We have also prepared a Disability Tax Credit Eligibility Decision Tree to help you determine whether you are eligible for the disability tax credit or not. Check it out!

Adoption Tax Credit

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For individuals considering adoption or currently involved in the adoption process CRA offers an Adoption Tax Credit.

Adoption period:

  • begins at the earlier of :
    • the time the eligible child’s adoption file is opened with a provincial or territorial ministry responsible for adoption (or an adoption agency licensed by  a provincial or territorial government); and
    • the time, if any, that an application related to the adoption is made to a Canadian court; and
  • ends at the later of :
    • the time an adoption order is issued by, or recognized by, a government in Canada in respect to the child; and
    • the time that the child first begins to reside permanently with you

Eligible adoption expenses are:

  • fees paid to an adoption agency licensed by a provincial or territorial government
  • court costs and legal and administrative expenses related to an adoption order in respect of the child
  • reasonable and necessary travel and living expenses of the child and the adoptive parents
  • document translation fees
  • mandatory fees paid to a foreign institution
  • mandatory expenses paid in respect of the immigration of the child
  • any other reasonable expenses related to the adoption that are required by a provincial or territorial government or adoption agency

Completing your tax return:

  • the maximum claim per child is $11,128 – the two adoptive parents can split eligible expenses as long as the total combinedclaim is not more than the amount before the split
  • parents can claim these incurred expenses in the tax year including the end of the adoption period in respect of the child
  • you must reduce your eligible expenses for any reimbursements or other forms of assistance you received.
  • keep all your documents in case CRA asks to see them
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