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Financial planning tips

April 09, 2019

Are you paying more tax than you need to?

If you’re not claiming all the tax credits and deductions you’re entitled to, you may be paying more to the government than you need to.

What you can deduct from your taxes

Deductions from income and tax credits are reported on lines 206 to 485 of your income tax return. So, take some time to review them carefully. There may be steps you can take to maximize the amount you can claim.

For example, you have until March 1 to top up registered retirement savings plan contributions that you can claim as a deduction for the previous year. The deadline can be a day or two later, if March 1 falls on a weekend. And claiming a tax deduction can often mean getting a refund come tax time.

The same is true of tax credits. Taking some time to pull together all the receipts you need to claim allowable credits can mean real savings.

What’s the difference between claiming a tax deduction and a tax credit?

What are tax deductions?

Tax deductions reduce the overall amount of tax you have to pay by reducing your annual income. That’s because they come straight off your annual earnings.

For example, if you’re a salaried employee, your employer has likely deducted tax all year from your paycheque, based on your estimated annual income. By contributing to an RRSP and effectively reducing your income, you may end up having paid more tax than necessary and so qualify for a refund.

Just remember, says the Million Dollar Journey blog, “If you're getting a big tax refund at the end of the year, that money was basically an interest-free loan to the government.” A better approach is to make regular RRSP contributions and get your employer to reduce your tax payments at source.

Also, while you get a tax break on your contributions to an RRSP, you will pay tax on your withdrawals. This works well if you expect to be in a lower tax bracket in retirement (or when you draw the money out) than you’re in now. If not, you may want to consider putting your money in a tax-free savings account instead. Read Where to stash your cash to help you weigh your options.

What are tax credits?

Tax credits fall into two categories, non-refundable or refundable:

  • Non-refundable tax credits (such as eligible tuition expenses) are applied directly to your tax bill to reduce the amount of tax you owe. They are not paid out directly. You must owe tax in order to claim them.
  • Refundable tax credits (such as the federal GST/HST Tax Credit) are government tax refunds. They are paid out automatically, often in a series of payments throughout the year. They go to anyone who files a tax return who qualifies.

You can get more details on non-refundable and refundable tax credits from The Financial Consumer Agency of Canada.

For more information on what you can deduct and where to report tax credits and deductions, visit the Canada Revenue Agency.

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