What are tax credits in Canada and how to use them
Tax credits can lower your overall tax bill if you can use them. Find out which tax credits might be right for you and your finances.
In Canada, both federal and provincial taxes are based on how much money you make, but some years you may pay less than what your tax rate says you should. When this happens, tax credits usually earn some of the...well, credit.
Tax credits are like a discount on your income tax bill as a whole. You may be able to get several of them if you meet certain personal or financial standards.
Tax credits: How they work
Tax credits are benefits offered by the federal, provincial, and territorial governments of Canada that directly lower the amount of tax you have to pay. Tax deductions, on the other hand, lower the amount of income that can be charged in the first place.
You can use as many tax credits as you want, as long as you apply for them. Tax credits make it more likely that the government will give you a tax return, but they don't make it a sure thing.
Types of tax credits
There are two kinds of federal and local tax credits: those that you can get back and those that you can't.
No matter how little income tax you owe, you will get refundable tax credits. Even if you don't owe any income tax, you can still get a credit for the amount that has been set.
On the other hand, tax credits that aren't refundable can only help you pay less tax. If you don't owe any taxes or if your non-refundable tax refunds add up to more than what you owe, you won't get any extra money back.
Finding and applying for tax credits in Canada
Visit the Government of Canada website and look for topics that apply to you. This is one way to find possible federal tax credits.
You can also look through the directory of provincial and territorial tax credits to find more possible benefits. Even though it's helpful to know what you might be able to get and what to expect, you really only need to do this study if you're doing your own taxes by hand.
If you pay a tax pro to do your return, they should find all of the credits that apply to you and claim them. Also, if you use online tax tools, you should be told about any tax credits that apply to you.
How to actually claim these tax benefits depends on the credit itself. Some tax credits are given to eligible people immediately, while others must be applied for so that eligibility can be checked. You can use the links above to do your own research or talk to a professional about your choices.
Common tax credits in Canada
Here are some of the most common tax credits that Canadians can use. Each person's situation will determine whether or not they are eligible.
The Basic Personal Amount
All taxpayers can claim a basic personal amount, which changes every year based on inflation, thanks to this non-refundable tax credit. Then, a portion of this amount can be used as a tax credit to lower the amount of tax that needs to be paid. For example, for the tax year 2022, the most a person can get from the federal government is $14,398. The Canadian government lets people who are qualified claim a tax credit for 15% of that amount, or $2,159.70. You can also get basic personal amount credits from the provinces to lower your provincial taxes.
How Much the Home Buyer Pays
The Home Buyers Amount is a non-refundable tax credit that first-time home buyers can use to lower their federal taxes by up to $1,500. Keep in mind that there are a few rules about who can get this credit.
Credit for GST/HST
People who file a tax return in Canada and are eligible for the goods and services tax/harmonized sales tax credit, or GST/HST credit, will automatically get it. This tax credit is given to Canadians with low to middling incomes to help them pay less in taxes on goods and services over the course of the year. The money is given out four times a year.
Credits for child care
Like the Canada Child Benefit, there are also a number of federal and local tax credits for parents of young children. The Canada caregiver amount, the disability tax credit, and the Canada workers benefit are all federal tax credits that parents may be able to use. There may also be tax credits for child care in your province or region.
Tax benefits also fall into the following groups:
Income from a pension.
Having a disability.
Donations to good causes.
Costs for health care.
Work from home costs.
Costs of education.
Dues to a union.
Costs of moving.
If you're not sure what tax credits and deductions you can use to lower the amount of income tax you owe, you can use internet tools from the Canadian government to find out.
You could also meet with a trusted accountant or tax preparer who can help you figure out what refunds you might be eligible for.
Frequently Asked Questions (FAQs) About Tax Credits in Canada
1. What are tax credits in Canada?
Tax credits in Canada are benefits offered by the federal, provincial, and territorial governments that directly reduce the amount of income tax you need to pay. They act as discounts on your total tax bill, potentially resulting in a lower tax liability.
2. How do tax credits work in Canada?
Tax credits lower the amount of income tax you owe, whereas tax deductions reduce the taxable income on which your tax is calculated. You can apply for and use as many tax credits as you qualify for. However, they do not guarantee a tax refund but increase the likelihood of receiving one.
3. What's the difference between refundable and non-refundable tax credits?
Refundable tax credits can result in a tax refund even if you owe little to no income tax. Non-refundable tax credits can only reduce your tax liability and do not provide additional money back beyond what you owe in taxes.
4. How do I find and apply for tax credits in Canada?
You can visit the Government of Canada website to explore federal tax credit options. Additionally, there are provincial and territorial tax credits you can find in their respective directories. If you're preparing your taxes on your own, researching these credits is helpful. Tax professionals or online tax tools can also help identify and claim applicable credits.
5. What are some common tax credits in Canada?
Basic Personal Amount: All taxpayers can claim this non-refundable tax credit, which varies annually. It lowers the taxable income, reducing the amount of tax owed.
Home Buyers Amount: First-time home buyers can use this non-refundable tax credit to lower federal taxes by up to $1,500.
GST/HST Credit: Automatically given to eligible individuals filing tax returns. Helps those with lower to moderate incomes pay less tax on goods and services.
Child Care Credits: Various federal and local tax credits are available for parents of young children, such as the Canada Child Benefit, disability tax credit, and Canada workers benefit.
6. What are some other categories of tax benefits?
Tax benefits in Canada encompass a range of categories, including age-related credits, pension income credits, disability-related credits, charitable donation credits, healthcare expense credits, work-from-home expense credits, education-related credits, union due credits, and moving expense credits.
7. How can I determine which tax credits I'm eligible for?
You can use online tools provided by the Canadian government to find out which tax credits and deductions you qualify for based on your personal and financial situation. Alternatively, consulting a reputable accountant or tax preparer can help you identify potential refunds and benefits.
8. Can I use both federal and provincial tax credits?
Yes, you can use both federal and provincial tax credits to reduce your overall tax liability. Many of the tax credit programs have both federal and provincial components.
9. Are tax credits guaranteed to result in a tax refund?
While tax credits increase the chances of receiving a tax refund, they don't guarantee it. The final amount of your refund will depend on your overall tax situation, including your income, deductions, and credits.
10. Can I claim tax credits retroactively for past years?
In most cases, you can only claim tax credits for the year they apply to. However, some tax credits may allow for adjustments in certain situations. It's recommended to consult a tax professional for guidance on specific cases.