Posts Tagged ‘deduction’

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.

Moving Expenses Deduction

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If you move to a new location, you may be eligible to deduct your moving expenses.

The general rules are you may deduct moving expenses from your income if you meet the following three requirements:

(1) You move your residence in order to earn wages or self-employment income in a new location in Canada (even if you will be working for the same employer);

(2) Your move results in your new residence being at least 40 kilometres closer than your former residence to your new place of work or business; and

(3) You cease your business or employment at the former location.

Students, under certain circumstances, may also claim moving expenses.

Special Rules for Students

If you have been in full-time attendance at a university or other post-secondary educational institution in Canada, and you move within Canada to take a job including summer employment, or to start a business, you may claim a moving expense deduction under the same general rules as those for persons who have been earning income.

You may deduct moving expenses only against income from scholarships, fellowships, research grants and similar awards, and only to the extent that such income is reported on your tax return. Many scholarships and fellowships are now tax-exempt and thus, the moving expense deduction for students may be limited.

Students leaving Canada to study full-time at a post-secondary educational institution abroad are also entitled to deduct moving expenses from scholarships, fellowships, research grants and similar awards.

Moving expenses of a student may only be deducted if the move results in the student residing at least 40 kilometres closer to the educational institution.

Please visit the CRA website link below for a list of eligible moving expenses and for further details pertaining to the moving expenses deduction.

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