Personal Income Tax Deductions in Canada
Canada's federal and provincial governments use income tax deductions to reduce the tax for some taxpayers and to promote certain activities considered to be beneficial.
Some deductions reduce the income subject to tax, while others reduce the amount of the tax directly. As a taxpayer, you should be aware of all the deductions that are available to avoid overpayment.
To calculate your tax due, add up your income from all sources. You may be able to deduct expenses from certain types of income, if the expenses represent costs necessary to create the income in the first place.
For capital gains declared on Schedule 3, you may have costs or exemptions that you can deduct.
For investment income declared on Schedule 4, you often have carrying charges and interest deductions.
If you earned self-employed income from a business, as a professional, from a farm or from a fishing operation, you have to fill out Form 2125, Statement of Business or Professional Activities, and deduct your business-related expenses from your income.
If you lost money from any of these activities, you can sometimes deduct the loss from other income.
Deductions That Reduce Taxable Income
Deductions also can be taken after calculating your total income. Governments don't charge income tax on some of your income and allow you to subtract other amounts, such as RRSP contributions.
You can, for example, deduct money spent on child care and expenses related to employment including moving costs if you change jobs. Your total income minus these deductions equals your net income.
There are a few items you may be able to deduct from the net income because of special circumstances. You could, for example, deduct losses from previous years and an amount if you are a northern resident.
The best strategy for claiming deductions of this type is to go through your income tax form line by line.
If you aren't sure how to identify a deduction, look at the guide for the line number next to the deduction. The guide explains how to claim the deduction and whether you are eligible.
Deductions That Reduce Income Tax
The Canada Revenue Agency allows you to deduct amounts from the tax that you owe based on your taxable income. You can carry out these calculations on Schedule 1.
Deductions include the basic personal amount that every taxpayer can use, and amounts for a spouse, age bracket and dependents if you qualify. There are numerous possible deductions on Schedule 1 and, while many represent small amounts, they can add up to substantial savings.
Tax specialist and business consultant Natalie Fong-Yee, CA, at Fong-Yee Professional Corporation based in Toronto, says that people sometimes don't claim all the deductions for which they qualify.
"Typically one tax credit that clients miss are the fitness and arts amounts for children," she says. You can claim these credits for fees paid to enroll children under age 16 in qualifying fitness or arts activities up to a $500 limit.
Non-refundable vs. Refundable
Tax deductions that reduce your taxable income, or amounts you can subtract from your tax due, are known as non-refundable. This means you can use the deductions to reduce your tax payable to zero, but you can't claim a refund based on these amounts.
Refundable tax credits, as the name suggests, result in a refund. Normally, you have already paid some income tax, either through salary deductions or via installments paid during the year.
To these amounts, you can add any over payments you made on employment insurance or the government pension plan.
The Working Income Tax Benefit is an example of a refundable tax credit. When the total of these amounts is more than the amount of tax due, or if there is no tax due because the deductions have reduced it to zero, you could receive a refund.
References & Resources
- Natalie Fong-Yee, CA; Fong-Yee Professional Corporation; Toronto, Ontario
- GetSmarterAboutMoney.ca: How Income Tax Works
- TaxTips.ca: How Is Income Tax Calculated in Canada
- CRA: Line Index (300 to 378), Federal Non-Refundable Tax Credits
- Canada Revenue Agency: Working Income Tax Benefit