Tax Credit and Tax Deduction

What Is The Difference Between A Tax Credit and A Tax Deduction?

First Published: November 5, 2009

Tax Deduction

A tax deduction is an amount of money which lowers your taxable income.

Tax deductions reduce taxable income.

Tax deductions may make your taxable income zero by exceeding your employment income.

Tax deductions reduce more taxes for those who are in higher tax brackets than for lower tax brackets.

If you live in Ontario and in the highest federal tax bracket (29%), your federal and provincial combined marginal tax rate is 46.41% – as of 2009. If you have $100 tax deduction = you will save $46.41 in tax. If you are in a lower bracket, you will receive less savings.

Tax deduction examples: RRSPs, Childcare expenses, Capital losses, Moving expenses.

Tax Credit (Non-Refundable)

A tax credit is a dollar for dollar deduction which is subtracted from the amount of tax you pay.

Tax credits lower taxes payable at the lowest tax rate

Tax credits may not make your taxable income zero because it only reduces taxes payable at the lowest tax rate.

Tax credits are fixed amounts, so they reduce same monetary value to all taxpayers – if you have enough taxable income to make the deduction.

Tax credits are calculated based on the lowest federal and provincial tax rates. For 2009, lowest federal and provincial rates are 15% and 6.05% (Ontario). Therefore, if you have $100 tax credit, you will save $15 + $6.05 = Total $21.05 – regardless of tax bracket.

Tax credit examples: Medical expenses, Eligible dependent, public transit credit, Caregiver amount, Tuition and education amount, Charitable donations.

Tax Deduction or Tax Credit – which one is better? The answer can be a tricky one and it may not as simple as it looks. In general, tax deduction seems to favour the higher income group, but I would suggest you to consult a tax professional. For more Info,
please visit – Canada Revenue Website.