The Canadian Government wants to keep tax rates competitive with other developed countries and promote behavior it considers desirable. At the same time, it wants to reduce the tax burden of low-income earners and encourage them to remain in the workforce.
The tax system applies tax relief measures to further these goals, but taxpayers have to be familiar with the details to take advantage of them.
How Tax Relief Works
The Canadian tax system specifies tax rates for the various income levels and offers relief in the form of deductions and credits. Non-refundable tax credits offer substantial relief to some earners, while refundable tax credits can reduce income tax to zero and provide refunds for others.
For sales tax relief, consider applying for the sales tax credit by checking the corresponding box on the first page of the income tax form. To benefit from tax relief, you have to know what deductions and credits apply to your particular situation.
Paul St-Julien, CPA, with Paul St-Julien CPA Inc. based in Hudson, Québec says that every case is different and depends on the situation of the person filing the return.
“You have to consider such factors as age, pension plan, family situation and age of any children to determine which deductions and credits will result in the biggest tax savings,” he says.
“For example, low income earners with high medical expenses may qualify for a refundable tax credit that can give them a substantial refund.”
First, you can reduce your tax by deductions from income. Then, with calculations on Schedule 1, you identify personal non-refundable tax credits that you can deduct from tax payable.
Finally, you can add refundable tax credits to the amount the government owes you to reduce the tax balance you have to pay or to claim a refund. Québec has separate income tax forms, but the province follows the same principles.
Income Deductions Reduce Taxable Income
The first stage in calculating your taxable income is to add income from all sources to get your total income. If you have losses in the tax year from a business, farm or profession, you can deduct those losses from your income from other sources.
For example, if you still have your job but have just invested in setting up a leasing business that still brings in very little revenue, you can claim the loss against the income from your salary.
Next, you calculate your net income. In this calculation you can make deductions such as RRSP contributions, child care expenses, moving expenses and mandatory contributions from self-employment income. These deductions offer tax relief by reducing your net income.
Finally, you have to calculate your taxable income. At this stage you can deduct losses from other years from your income.
Capital losses, such as from stock market investments, can only be deducted against capital gains, but non-capital losses reduce your taxable income directly.
Non-refundable Tax Credits Reduce Income Tax
These tax credits, which you claim on Schedule 1, offer tax relief by allowing you to apply them against the taxes due on your taxable income.
In addition to credits that everyone can claim, such as the basic personal amount, the spouse amount if you have a spouse and the age amount if you are over 65, there are credits for certain expenses, such as medical expenses, tuition, and the public transportation amount.
The credits all have a line number on the form, and you can look up the number in the tax guide to find out whether you qualify for a particular credit.
Once you have added up your credits, you multiply by the factor given on the form and deduct the result from the amount of your taxes.
They are called non-refundable tax credits, because you can use them to reduce your tax to zero, but you don’t get a refund even if your credits are more than your taxes.
Refundable Tax Credits Benefits
Low income earners, who may be able to reduce their tax to zero with the non-refundable tax credits, can sometimes get a refund based on refundable tax credits that are added to the tax credits at the end of the form.
Normally you pay some income tax during the year through salary deductions, withholding on investments or through installments.
You enter the tax already paid at the end of your income tax form and add certain refundable tax credits such as the working income tax benefit or the refundable medical expense supplement.
You add these credits to the tax already paid and subtract the total from the tax you owe. A negative balance gives you a corresponding refund.
References & Resources
- Paul St-Julien, CPA; Paul St-Julien CPA Inc.; Hudson, Québec
- CRA: Eligible Medical Expenses