Tax Credit Vs. Tax Deduction: What's the Difference?

When tax season rolls around, you'll often hear about tax credits and tax deductions.

While both can save you money, they work in very different ways.

What is a Tax Deduction?

A tax deduction reduces your taxable income. It lowers the amount of income that gets taxed, which indirectly reduces the tax you owe.

How It Works:
If you earn $50,000 and claim $5,000 in deductions, you'll only be taxed on $45,000. The amount you save depends on your tax bracket.

Example:

• Taxable income: $50,000

• Tax deduction: $5,000

• New taxable income: $45,000

• If you're in a 20% tax bracket, you save: $5,000 × 20% = $1,000

What is a Tax Credit?

A tax credit directly reduces the amount of tax you owe. It's a dollar-for-dollar reduction of your tax bill, making it more valuable than a deduction of the same amount.

How It Works:
If you owe $3,000 in taxes and have a $1,000 tax credit, you'll only owe $2,000.

Example:

• Tax owed: $3,000

• Tax credit: $1,000

• New tax owed: $2,000

• You save: $1,000

Types of Tax Deductions in Canada

RRSP Contributions
Contributions to your Registered Retirement Savings Plan reduce your taxable income.

Childcare Expenses
Eligible childcare costs can be deducted from your income.

Employment Expenses
If you work from home or have job-related expenses, you may qualify for deductions.

Moving Expenses
If you moved for work or school, certain moving costs may be deductible.

Medical Expenses
You can deduct eligible medical expenses that exceed a certain threshold.

Types of Tax Credits in Canada

Basic Personal Amount
Every Canadian taxpayer gets this non-refundable credit automatically.

Canada Workers Benefit
A refundable credit for low-income workers.

Disability Tax Credit
Available to individuals with severe and prolonged impairments.

Tuition Tax Credit
Students can claim tuition fees paid to eligible institutions.

GST/HST Credit
A refundable credit for low and modest-income individuals and families.

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Make Tax Season Work for You

Understanding the difference between tax credits and deductions empowers you to make smarter financial decisions throughout the year.

While deductions lower your taxable income, credits directly reduce what you owe—making them typically more valuable.

Keep thorough records, stay informed about available credits and deductions, and don't hesitate to seek professional help if needed.

^{¹Based on users with a starting score of 500 or less and who signed up for credit building in October 2024. Credit Building is not a credit repair tool and does not guarantee an improvement in credit score. Credit scores are based on complex models involving a variety of factors. Consistent on-time payments help improve scores and missed or late payments may cause credit scores to decrease. Outcomes may vary among users.}