Overview

Not sure how tax deductions and credits actually work? In this guide, Accountants-BC Ltd.’s accountants break it down in simple terms so you can file with confidence and get the most from your return.

Highlights

Introduction

You gather your receipts, fill out the forms, and still wonder if you missed something. Not knowing how deductions and credits actually work is one of the most common reasons Canadians overpay on their taxes. Many people assume they’re the same or use them interchangeably, but they work in very different ways. That confusion can lead to missed claims, smaller refunds, or filing errors. This guide breaks down what each one does, how they affect your return, and what you need to prepare.

What Do You Need To Know About Tax Deductions?

Tax deductions reduce the portion of your income that is taxable. In Canada, they’re applied before tax credits and can lower the amount you owe by lowering the income on which your taxes are calculated. The value of a deduction depends on your income. People in higher tax brackets often see more savings when they claim eligible deductions.

Deductions must be claimed properly and supported by clear records. Not all taxpayers qualify for the same deductions, and eligibility depends on your personal and financial circumstances. Knowing how deductions work helps you prepare an accurate return and avoid problems with the CRA.

Common Deductions You Can Claim

Many Canadian taxpayers qualify for tax deductions that reduce their taxable income and lower the amount they owe to the CRA. These deductions depend on your personal and financial situation, but often apply to everyday expenses.

For example, you can deduct contributions to a Registered Retirement Savings Plan within your allowed limit. You may also claim childcare costs if they helped you work or go to school. Self-employed individuals can deduct business expenses, such as office supplies, travel, and workspace use. Moving expenses may be deducted if you moved at least 40 kilometers for work or school. Union or professional membership fees can also be claimed. To deduct these amounts, you need to maintain proper records and report them correctly on your return.

What Documents Do You Need To Claim Deductions?

To claim deductions on your Canadian tax return, certain CRA documents may be required depending on the type of deduction.

Here are some commonly used forms:

  • T777: Used to claim employment expenses (requires a signed T2200 from your employer)
  • T1-M: Required to deduct moving expenses when you’ve relocated for work or school
  • T2125: Used by self-employed individuals to report business income and deduct eligible business expenses
  • Schedule 7: Used to report and deduct RRSP contributions
  • RC66: May be needed when claiming deductions that affect eligibility for benefits like the Canada Child Benefit

Some deductions can be entered directly on your T1 General return without a separate form, but supporting documentation should still be kept in case the CRA requests verification. If you're unsure which forms apply to your situation, a tax professional can help ensure everything is completed correctly.

What Do You Need To Know About Tax Credits?

In Canada, tax credits lower the amount of tax you owe. They are different from tax deductions, which reduce your taxable income. Credits are applied after your tax is calculated, so they take money off your final bill. Some tax credits are non-refundable, which means they can reduce your tax to zero but will not give you money back. Others are refundable and can lead to a payment if they subtract more than you owe.

Common Tax Credits You Can Claim

Many Canadians are eligible for tax credits that help reduce the amount of tax they owe or increase their refund. Some credits are available to most taxpayers, while others are dependent on factors such as income, education, or health.

Common examples include the basic personal amount, which gives all eligible Canadians a set credit each year. The GST/HST credit supports low- and modest-income households. The Canada Workers Benefit helps individuals with lower incomes who are employed. Students may claim tuition credits, and people with long-term disabilities can apply for the Disability Tax Credit. Each credit has its own specific rules, and some require forms to be completed or approved by the CRA.

What Documents Do You Need To Claim Tax Credits?

To claim tax credits in Canada, you may need to submit or keep documents that show you qualify.

Here are some commonly used forms:

  • T2202 tuition form: Confirms eligible tuition fees paid to a qualifying school
  • T2201 disability certificate: Required to apply for the Disability Tax Credit
  • Proof of income: Needed to claim credits tied to employment or low income, such as the Canada Workers Benefit
  • Identification and residency documents: May be needed when claiming credits that consider household or family status

Additionally, the CRA Notice of Assessment will show any credits you’re automatically eligible for, like the GST/HST credit. Keeping these forms and documents organized will help you file accurately and avoid delays.

How Do Deductions and Credits Affect Your Refund?

Deductions and credits both help reduce how much tax you pay, but they do so in different ways. Deductions lower your taxable income, which means you may owe less tax when your return is calculated. The higher your income, the more value a deduction might have. Credits reduce the actual amount of tax you owe, dollar for dollar. Some credits can even give you money back if you owe nothing. When used together, deductions and credits can lower your tax bill or increase your refund.

Deductions Are Based on Your Income Bracket

The value of a tax deduction depends on your income level. In Canada, tax is calculated using brackets, where different parts of your income are taxed at different rates. When you claim a deduction, it reduces the amount of income in those brackets. If you are in a higher tax bracket, a deduction can save you more money than it would for someone in a lower bracket. This means two people claiming the same deduction may see different results.

Credits Are Fixed-Value Benefits

Tax credits are fixed-value benefits, which means they reduce your tax by a set amount, no matter how much you earn. Unlike deductions, credits do not change based on your income bracket. If you qualify for a $500 credit, it reduces your tax bill by $500, regardless of your income level. Some credits are non-refundable and can only bring your tax down to zero. Others are refundable and may result in a payment even if you owe no tax. Since they offer the same value to everyone who qualifies, tax credits are a reliable way to reduce your overall tax burden.

Refund Size Depends on How Much You Owe

Your tax refund is not based on how many deductions or credits you claim alone. It depends on how much tax you paid during the year compared to how much you actually owe. If your employer took more tax than needed from your pay, or if your credits and deductions reduce your tax below what you already paid, you may get a refund. If you paid exactly the right amount, you may break even. If you paid too little, you may owe money instead. Deductions and credits help reduce your tax, but your refund amount is affected by many factors and how they all balance out.

Combining Deductions and Credits Increases Tax Savings

Combining deductions and credits together can help you save more on your taxes. Deductions lower your taxable income, which reduces the amount of tax you have to pay. Credits then reduce your tax bill even further, sometimes giving you a refund. When claimed correctly, these two tools work together to lower what you owe or increase what you get back. Understanding how they apply to your specific situation can help you make more informed choices when preparing your return.

When Should You Work With a Tax Professional?

Working with a tax professional is a wise choice when your return is more complex or you're unsure what to claim. If you have multiple income sources, are self-employed, or want to make the most of available deductions and credits, expert guidance can make a big difference.

A tax professional can review your situation, find opportunities to reduce what you owe, and help avoid costly errors. Tax preparation services offer comprehensive support at every step, from organizing documents to ensuring timely filing. If your finances have changed or you want to feel confident about your return, working with a tax professional can help you file accurately and get the best possible outcome.

Ready To Start Your Tax Preparation?

Tax season brings a multitude of details to manage, but understanding how deductions and credits work can make a significant difference. When you work with Accountants-BC Ltd.’s tax preparation team, you get guidance tailored to your situation. We’ll help ensure your return is accurate, complete, and takes full advantage of the deductions and credits available to you.

Call (604) 683-2341 to speak to a team member today.