As tax season approaches each year, Canadian taxpayers often find themselves combing through piles of faded receipts, trying to decide just what they can claim on their taxes. The notion of claiming expenses on one’s personal tax return is often misunderstood; the widespread false belief that we can just “write off” almost any expense to reduce our tax bill has only made matters more complicated for the average taxpayer.
While filing one’s taxes will always induce a bit of stress, knowing what you can potentially claim and the affect it will have on your tax bill is something every Canadian taxpayer should familiarize themselves with.
Below we will cover all of the intricacies of the tax claim process including an explanation of the difference between a tax credit and a tax deduction, the most common tax deductions and credits, and how to easily file your taxes while maximizing any potential credits and deductions that might help lower your tax bill.
What Is A Tax Credit?
Simply put, a tax credit reduces the amount of tax you owe on your income dollar for dollar. Your taxable income amount doesn’t change. A tax credit just lowers the amount of tax you will need to pay on that income.
Tax credits can be issued federally, provincially, or by territory. There are two types of tax credits: refundable tax credits, and non-refundable tax credits.
Refundable Tax Credit
A refundable tax credit can be paid out to you even if you don’t owe any income tax at all. The term “refundable” means that if the amount of the credit is more than what you owe, the difference will be credited to you.
For example, if you have a $900 tax bill and $1100 in credits, you will be paid out the $200 difference. The most common refundable tax credit in Canada is the goods and services tax/harmonized sales tax (GST/HST) credit. Refundable tax credits are generally paid out 2-3 times throughout the course of the year to help taxpayers with their general cost of living expenses.
Refundable tax credits can be based off criteria including your age, income, type of work, and more. They also apply to specific life events, including the First Time Homebuyer’s Tax Credit. One important element to note is that refundable tax credits can change from year to year. New programs may be brought in, and even the amount of the credit may fluctuate.
Non-Refundable Tax Credit
Canadian tax-payers are eligible for non-refundable tax credits, which can be used to bring down your overall tax bill. The “Personal Amount” non-refundable tax credit is a set amount by each government every year (federal, provincial, and by territory) used to help bring down your bill. They do not result in a credit.
Here’s how it works: For the tax year 2021, the federal personal amount is set at $13,808. The federal government then allows you to claim up to 15% of this personal amount ($2,071.20 in this case). If you owed $4000 in federal income tax, the non-refundable tax credit would bring that amount down to $1,928.80. Not bad! Note that non-refundable tax credits can only be applied if the amount of the credit is lower than what you owe.
There are also a number of personal exemption non-refundable tax credits, including credits for those on a pension, taxpayers with children, taxpayers over 65-years-old, etc.
What Is A Tax Deduction?
Unlike a tax credit, a tax deduction for income tax may actually lower your amount of taxable income, thereby reducing the amount of taxes you will need to pay. This can have a dramatic effect on the amount of taxes you will owe for the year.
One of the most common tax deductions is through Canada’s Registered Retirement Savings Plan (RRSP). This is a great tax deduction to maximize, since you are essentially paying yourself to save money.
Money that you put into your RRSPs before the March 1 deadline will be deducted from your earned income, resulting in a lower total taxable income, all while contributing to your retirement fund. For example, if your taxable income is $40,000 and you add $5,000 to your RRSP’s, your taxable income would be reduced to $35,000.
You can enter a lower tax bracket by saving up throughout the year and contributing to your RRSPs before the deadline. The amount you can add each year will be outlined in your annual Notice of Assessment. The amount rolls-over, so if you haven’t contributed in a number of years, those amounts will be added up, offering you a larger threshold to contribute when you have the funds.
Other tax deductions include amounts spent on child care, certain employment expenses, union/pension dues, and many more. If you have a learning or physical disability, you can also deduct expenses that you incurred for school or work.
Work From Home Tax Deduction in Canada
With many more taxpayers having worked from home during COIVD, the federal government has now simplified the home tax credit for most situations. You can now claim up to $2 a day on your federal return if you worked from home in 2020-2023 (for a maximum of $400 in 2020, and $500 each in 2021, 2022, and 2023). Best of all, you don’t need to sort through any receipts or ask your employer for any paperwork. As long as you worked from home for at least four consecutive weeks throughout the year, you are entitled to this “temporary flat rate method.”
However, if you have higher expenses related to working from home, you can use the “detailed method,” which allows you to enter the exact amounts paid for each expense. This method is best for those with higher expenses, and does require your employer to submit a T2200S/T2200 form.
Home Office Tax Deduction in Canada
If you have a home office, you can also deduct partial expenses related to your home office as a tax deduction. However, you can only apply these expenses for the actual amount of space the office occupies in your home. For example, if you live in a 1000 square foot apartment with a 100 square foot space dedicated to your home office, you can’t claim your full rent as an expense; you would only be able to claim 10%. This also applies to expenses related to heating, internet, a phone line, etc. Being overzealous with home office deductions in Canada is a likely way to trigger a CRA audit, which taxpayers will want to avoid at all costs.
Home office expenses you can claim (if you meet the eligibility requirements) include electricity, heating, hot water, internet, maintenance and minor repair costs, a portion of your rent, and more.
Ineligible home office expenses include mortgage fees (on both the principal and interest), costs associated with hooking up the internet in your home, furniture, cosmetic home upgrades, and more. Essentially, any expenses related to your home that are not explicitly required for you to do your job from home will not be considered eligible towards a tax credit.
Moving Expense Tax Deduction in Canada
Moving can be a major financial burden, but you may be able to apply a moving expense deduction to help offset your tax bill. There are a few different criteria for the moving expense deduction, including students who moved to be closer to school, an employee who moved to a new residence at least 40 km closer to work, or a self-employed worker who moved to set up a business in a new location.
Potential moving expenses you can deduct (based on eligibility) include paying for movers, travel expenses, expenses related to the selling of your previous home, food costs associated with your move, and even temporary housing (including hotels) for up to 15 days. Not all expenses will be applicable to every situation, but there are a wide range of deductions potentially available to account for nearly any moving situation imaginable.
Medical Expense Tax Deduction in Canada
Many medical expenses can be claimed as tax deductions on your return. While some eligible expenses require proof of a prescription, many medical expenses do not. The CRA website has an exhaustive list of eligible medical expenses that you can refer to before you begin to prepare your tax return.
Eligible medical expenses include laboratory tests, purchasing new eyewear, the cost of a hospital bed, and more. Ineligible expenses include dental work, gym fees, and medical marijuana, among others.
After you’ve determined the medical expenses you are looking to claim, figuring out the claimable amount takes a bit of work. Once you’ve added up your medical fees for the year (which can include medical expenses for your spouse or common-law partner and/or children), you will be asked to perform a quick calculation. You will either enter 3% of your salary or $2,421 (whichever amount is smaller). From there, you deduct that amount from your total expenses; the difference is the amount you can claim on your taxes.
Since you can claim expenses for your spouse or common-law partner, it’s worth performing the calculation based on both salaries to see which person is eligible for the larger deduction.
Other Noteworthy Tax Deductions and Tax Credits in Canada
In addition to the most common tax deduction and credits we’ve examined above, there are a number of other potential credits and deductions available that may greatly reduce your tax bill. They include:
1. Age amount
Taxpayers 65 and over can claim an age amount. The amount varies based on your income, and this amount can be transferred to your spouse or common-law partner, so some calculation would be beneficial to see how you can maximize this credit.
If you made a donation in the preceding year you can claim a tax credit for the full amount (up to 75% of your salary). Eligible outlets include registered charities, registered journalism organizations, registered arts organizations, and more.
3. Home buyers
First-time homebuyers can claim a tax credit in the amount of $5000 to help offset the costs of purchasing your first home.
4. Student loans
You can claim the interest paid on a loan for post-secondary education going back as far as 5 years on your tax return. (If a relative paid your loan for you, they can claim this amount.) Best of all, if you don’t owe any money for the current year, you can claim the interest you paid on any tax return in the next five years.
5. Child care
You can claim child care costs on your taxes including day care fees, nursery expenses, school fees, camp fees, and more. If you and your spouse or common-law partner are each claiming child care expenses, be sure to go over this section carefully, as some eligibility criteria may change based on your income.
6. Provincial tax credits
Additional tax credits may be available to you depending on the province or territory you reside in. The amounts will vary depending on your tax situation and income, but anything that helps bring down your total tax bill is a welcome addition.
Who Is Eligible For Tax Deductions and Tax Credits?
Most Canadian taxpayers should be eligible for tax credits and deductions. The amounts will vary depending on the details of your tax situation, your income, and other factors. As a general rule, more tax credits are available to lower-income taxpayers, or those with numerous applicable deductions. However, it’s a good idea to familiarize yourself with the available tax credits and deductions regardless of your income, as you may find ways to bring down your tax bill that you had never previously considered.
Online Tax Filing Software
Filing your taxes on your own has never been easier given the prevalence of easy-to-use and comprehensive tax filing software, which includes a basic free option or a paid upgrade for more involved returns. Some examples include:
Originally known as Simpletax, Wealthsimplke Tax is a component of the popular Wealthsimple app. A notable benefit of using Wealthsimple Tax is the option to manage and track your investments, trades, and tax returns all through one application. You can file your taxes free of charge or give a donation for their service.
Credit Karma Tax
Now known as Cash App Taxes, this tax filing software is a part of Cash App. In addition to sending payments to friends through the app, you can now also use the app to file your taxes free of charge.
The most recognizable name in the tax business, H&R Block now also offers an online tax filing system free of charge (with a paid upgrade) in addition to all of their physical locations throughout Canada.
Our Final Thoughts
Filing your taxes is always a stressful process, but understanding the types of tax credits and deductions available to you doesn’t only help lower your next tax bill, but will also stimulate ideas for how you can potentially save money in the future.
The process may seem daunting, but the CRA website clearly lists all of the tax credits and deductions available to taxpayers. Familiarize yourself with them, and you may be able to save more than you think.
Frequently Asked Questions
If you want to be prudent, keep copies of all of your receipts and official documents throughout the year. Certain tax credits or deduction will require backup while others won’t. It’s in your best interest to have all of your receipts and documents on-hand in case you discover a new potential credit you weren’t aware of earlier in the year. Keeping track of these documents and receipts all throughout the year will also provide a clear picture of your spending habits, which can have its own benefits if you are trying to stay on a budget.
Yes, students at most post-secondary learning institutions (college, CEGEP, university) can claim their tuition expenses on their tax filing. The amount of the tax credit is determined by multiplying the tuition amount by the lowest tax rate percentage (currently at 15%). For example, if a student paid $3000 in tuition, the tax credit would be $450 ($3000 x 15 %).
If you’ve worked more than 50% of the time from home for a period of at least four consecutive weeks throughout the year then you are eligible for the work from home tax credit in Canada. Due to a major increase in home work due to the COVID-19 pandemic, the federal government has instituted a new streamlined “temporary flat rate” credit, which reimburses $2 for each day worked at home (even if you are a part time worker). If you have additional home office expenses, you can choose to use the “detailed method,” where you can enter the actual amounts you paid for home office-related expenses. Note that you can only claim the actual percentage used strictly for your work for expenses, including rent and your phone.