Cardinal Point Wealth Management

Your Cross-Border Financial Advisor

Contact Us | Client Login

Canadian Tax Planning: Understanding Deductions and Credits

By

Whether you were born in Canada or are a US citizen now living in Canada, navigating the Canadian tax system effectively requires a solid understanding of the various deductions and credits available to individuals. These provisions can significantly reduce your taxable income and the amount of tax payable. Below is an overview of key personal tax deductions and credits to think about this tax season.

tax deductions

Tax Deduction vs. Tax Credit: What’s the Difference?

A tax deduction reduces your taxable income, which in turn lowers the amount of income subject to tax. The actual savings depend on your marginal tax rate (the rate at which your last dollar of income is taxed).

Example of a Tax Deduction
Let’s say you earn $300,000 annually and contribute $30,000 to your Registered Retirement Savings Plan (RRSP) in Canada. Because RRSP contributions are tax-deductible, your taxable income is now:
$300,000 – $30,000 = $270,000 (new taxable income)

If your marginal tax rate is 53.53%, you save:
$30,000 × 53.53% = $16,059 in taxes.

On the other hand, a tax credit directly reduces the amount of tax you owe dollar-for-dollar. Unlike deductions, credits do not depend on your income level or tax bracket.

There are two types of Tax Credits:

  • Non-Refundable Tax Credits – Can reduce your tax owing to zero but won’t provide a refund if they exceed your tax bill.
  • Refundable Tax Credits – If the credit is larger than the tax owed, you receive the difference as a refund.

Example of a Non-Refundable Tax Credit
Imagine your tax owing is $3,000, and you qualify for a $1,500 tax credit. Your tax bill is now:

3,000 – $1,500 = $1,500 owed

However, if the credit were $4,000, you would only reduce your tax bill to $0, with no refund.

Example of a Refundable Tax Credit
Let’s say your total tax owed is $1,200, but you qualify for a refundable tax credit of $2,000. You not only reduce your tax liability to $0, but you also receive a $800 refund.

Deductions

Deductions lower your taxable income, thereby reducing the base amount upon which taxes are calculated.

  1. Registered Retirement Savings Plan (RRSP) / First Home Savings Account (FHSA) Deductions
  2. Overview: Contributions made to an RRSP and/or FHSA are deductible from your total income, promoting retirement savings.
  3. Example: If you earned $300,000 in 2024 and contributed $30,000 to your RRSP or FHSA, you could deduct the $30,000, resulting in a taxable income of $270,000.
  1. Childcare Expenses
  2. Overview: Expenses incurred for childcare to enable you or your spouse to work, attend school, or conduct research are deductible. Common childcare expenses include:
    • caregivers providing childcare services
    • day nursery schools and daycare centers
    • educational institutions, for the part of the fees that relate to childcare services
    • day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program is not a sports school)
    • boarding schools, overnight sports schools, or camps where lodging is involved
  3. Example: Suppose you paid $8,000 in daycare fees for your child so you could maintain employment. This amount can be deducted for the spouse with the lower taxable income, reducing their taxable income accordingly.
  • Limits on Childcare Deductions in Canada:
    There are limits on childcare expenses that can be deducted in Canada. The maximum amount you can claim depends on several factors, including the age of your children and your earned income.
  • Age-based Limits
    The annual limits for childcare expense deductions are as follows:

    • $8,000 for each child under 7 years of age at the end of the year
    • $5,000 for each child between 7 and 16 years of age
    • $11,000 for each child who qualifies for the disability tax credit, regardless of age.
  • Income-based Limit
    In addition to the age-based limits, there is also an income-based restriction:

    • The total amount claimed cannot exceed two-thirds (2/3) of your earned income for the year
  • Example
    Let’s say you have three children ages 5, 7, and 15. The maximum amount you could claim would be $18,000 ($8,000 + $5,000 + $5,000). However, this is subject to the two-thirds of earned income rule.
  1. Moving Expenses
  2. Overview: If you moved at least 40 kilometers closer to a new place of work or post-secondary institution, you may be eligible to deduct moving expenses. Common moving expenses include:
    • Transportation and storage costs (such as packing, hauling, movers, in-transit storage, and insurance) for household items, including boats and trailers.
    • Travel expenses including vehicle expenses, meals, and accommodation, to move you and your household members to your new home.
    • Temporary living expenses for a maximum of 15 days for meals and temporary lodging near the old or new home for you and your household members.
    • Cost of cancelling your lease for your old home, not including any rental payments before the cancellation of your lease.
    • Incidental costs related to your move which include the following:
      • changing your address on legal documents
      • replacing driving licenses and non-commercial vehicle permits (not including insurance)
      • utility hook-ups and disconnections
    • Cost to maintain your old home when vacant (maximum of $5,000) after you moved, and during a period when reasonable efforts were made to sell the home. It includes the following:
      • interest
      • property taxes
      • insurance premiums
      • cost of heating and utilities expenses
    • Cost of selling your old home includes the following:
      • advertising
      • notary or legal fees
      • real estate commission
      • mortgage penalty when the mortgage is paid off before maturity
    • Cost of buying the new home if you or your spouse or common-law partner sold your old home because of your move.

    Example: You relocated for a new job and incurred $3,000 in moving costs. You can deduct these expenses from your income if the move meets the distance requirement.

  1. Carrying charges, interest expenses, and other expenses
  2. Overview: If you paid carrying charges or interest to earn income from investments or other expenses, you may be eligible to deduct these from your income. Common investment and other expenses include:
    • fees to manage or take care of your investments (other than fees you paid for services in connection with your pooled registered pension plan (PRPP), registered retirement income fund (RRIF), registered retirement savings plan (RRSP), specified pension plan (SPP), tax-free savings account (TFSA) and first home savings account (FHSA))
    • fees for certain investment advice or for recording investment income
    • reasonable fees, that have not already been deducted, to have someone prepare or assist you in filing your tax return if you have income from a business or property
    • interest you paid on money you borrowed and used to try to earn investment income, such as interest and dividends
    • legal fees you incurred relating to support payments that your current or former spouse or common-law partner, or the natural parent of your child, paid or will have to pay to you
    • annual dues for membership in a trade union or an association of public servants
    • professional board dues required under provincial or territorial law
    • professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law
  3. Example: You paid $4,000 in investment management fees for your taxable brokerage account in 2024. You can deduct these expenses from your income, thus reducing your taxable income.
  1. Employment expenses
  2. Overview: Employment expenses are work-related costs that an employee incurs and are not reimbursed for by their employer. These can include expenses for home office use, travel, vehicle expenses, and supplies. To qualify for these deductions, your employer must provide Form T2200 (Declaration of Conditions of Employment), which confirms that these expenses were necessary for your job. Common employment expenses include:
    • Home Office Expenses – If you work from home and meet the eligibility requirements, you may deduct a portion of your rent, utilities, and internet costs.
    • Vehicle Expenses – If you use your car for work (excluding commuting to/from work), you can deduct fuel, maintenance, and insurance costs, based on the percentage used for business.
    • Supplies & Equipment – Items like stationery, software, and cell phone expenses can be deducted if required for work.

    Note: Certain professions, such as commission-based employees, have additional deductible expenses, like client meals and entertainment.

  3. Example: Jane is a sales representative who works remotely and uses her personal vehicle to visit clients. Her employer requires her to cover some of her expenses, so she qualifies to deduct employment-related costs. Jane’s work-related expenses include:
    • Home office space: 20% of her apartment is used exclusively for work.
    • Monthly rent: $2,000 → Eligible deduction: $2,000 × 20% = $400/month
    • Annual home office deduction: $400 × 12 = $4,800
    • Vehicle expenses:
      • Business use: 50%
      • Annual costs (fuel, insurance, maintenance): $6,000
      • Eligible deduction: $6,000 × 50% = $3,000
  4. Total Employment Expenses Deducted = $4,800 (home office) + $3,000 (vehicle) = $7,800 deduction
  5. If Jane’s annual salary is $70,000, this deduction lowers her taxable income to $70,000 – $7,800 = $62,200 (new taxable income)
  6. If her marginal tax rate is 30%, she saves $7,800 × 30% = $2,340 in taxes!

Non-Refundable Tax Credits

Non-refundable tax credits reduce the amount of tax owed but cannot create a refund.

  1. Basic Personal Amount
  2. Overview: A standard amount that all taxpayers can claim, reducing taxable income.
  3. Example: For the 2024 tax year, the basic personal amount is $15,705 CAD if your net income is $173,205 CAD or less; otherwise it is $14,156 CAD. This means the first $15,705 (or $14,156 if your net income is greater than $173,205) of your income is not subject to federal income tax.
  1. Age Amount
  2. Overview: Individuals aged 65 or older may claim an additional credit.
  3. Example: If you turned 65 in 2024 and your net income is below the threshold, you could claim the age amount, providing further tax relief.
  1. Tuition, Education, and Textbook Amounts
  2. Overview: Students can claim tuition fees and, in some cases, education and textbook amounts.
  3. Example: You paid $6,000 in tuition fees for post-secondary education. This amount can be claimed as a non-refundable tax credit, reducing your tax payable.

Refundable Tax Credits

Refundable tax credits can result in a refund even if you have no tax payable.

  1. Canada Workers Benefit (CWB)
  2. Overview: A refundable tax credit for low-income individuals and families who are in the workforce.
  3. Example: As a single individual earning $20,000 annually, you may be eligible for the CWB, which would provide a refundable credit to supplement your income.
  1. Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit
  2. Overview: A tax-free quarterly payment to offset GST/HST for individuals and families with low and modest incomes.
  3. Example: If your income is below the established threshold, you may receive quarterly payments to help offset the GST/HST you pay on goods and services.

Conclusion

Understanding and utilizing these deductions and credits can lead to significant tax savings. For personalized advice, it’s recommended to consult with a Cardinal Point financial planner.