As the April 30th deadline for filing personal tax returns looms over taxpayers, it’s important to address one of the most common misconceptions about our tax system: “If you have a balance owing this year, it means you must have done something wrong.” In fact, it is common to owe taxes if not enough was deducted from your paystub. This can happen in instances where you have capital gains from investments or income from self-employment.
However, getting a refund simply means the CRA is giving back money it held on your account throughout the year, after the taxes deducted at source have been applied against actual taxes payable. You can reduce your final tax liability and/or increase your refund by availing yourself of the various tax deductions and tax credits available to you.
Tax deductions directly reduce your taxable income. This happens before the calculation of taxes owing. For example, if your total income for the year is $50,000 and you are entitled to a $10,000 deduction, your taxes owing will be based on $40,000 of taxable income. Examples of tax deductions include RRSPs, annual union or professional dues, child cares expenses, moving expenses, support payments, carrying charges such as investment management fees, and interest paid on money borrowed to earn investment income. With proper planning, you can make use of such deductions to reduce your income into a lower tax bracket.
Tax credits, in contrast, reduce the amount of taxes owing on a dollar-for-dollar basis. This happens after federal and provincial taxes are calculated based on your respective tax brackets.
For instance, if you acquired a home for the first time, you are entitled to a $5,000 Home Buyer’s Amount which provides a $750 credit against your amount of taxes owing for the year. Essentially, you will owe $750 less in federal income taxes this year. Other tax credit amounts include your basic personal amount, spousal and Canada caregiver amounts, tuition amounts, medical expenses and charitable donations.
Note that although the public transit and arts and fitness tax credits were eliminated, you can still claim the cost of eligible monthly public transit passes for the period of January 1, 2017, to June 30, 2017.
That being said, you can also get a provincial tax credit if your province chose to parallel the credit provided at the federal level. For example, in Ontario, taxpayers over 65 can claim the Ontario Seniors’ Public Transit Tax Credit for eligible transit expenses incurred on or after July 1, 2017. With respect to the charitable donation tax credit, if you factor in the provincial credits, you can receive up to 53 percent of any donations in excess of $200 that you made to a charitable organization.
To make the most out of your tax return, therefore, it is imperative to distinguish between—and take advantage of—the various tax deductions and credits at your disposal.
Based on the example provided above, suppose you have $40,000 of taxable income after deductions and $5,000 of taxes owing after the application of tax credits. If your employer withheld $6,000 in taxes over the year, your refund upon filing would be $1,000. Even though your return and taxes owing are due on April 30th (your return is due on June 15th if you or your common-law partner carries on a business as a sole proprietor or in a partnership during the year), you should file your return early especially if you are expecting a refund.