Episode #10: Canadian Tax Deductions Explained + 10 Deductions or Credits You Might Not Know About!
Do you actually understand how your taxes work? Can you confidently say that you know what it means to minimize your tax burden and that you’re taking steps to do this? Or, do you feel like you send some forms to an accountant, or plug a few numbers into turbo tax and the rest is a mystery? Do you send an accountant the bare minimum of information without providing them with updates about your life this year that may help them do a better job of your taxes?
If you feel mystified by the process of taxes every year, then chances are you’re probably ending up paying more tax than you need to, and leaving money on the table that you could be getting back just by understanding the concept of tax deductions.
Given that all of us have to file taxes throughout our lives, and that practically all of us feel absolutely mystified by the process every year, I’m actually astounded that we’re never once taught the basic ins and outs of understanding our Canadian tax system while we’re still students. So, today right as we’re getting into tax season, I’m going to give it my best shot to help you understand an important part of our Canadian tax system and hopefully end up saving you a bit of money this year by helping you simply understand the concept of a tax writeoff, or a tax deduction.
If you’ve watched Schitt’s Creek then A) we can be friends, and B) you probably know the tax write off scene. The write off scene hit close to home because most of us know that the concept of writing something off against our taxes exists, but aren’t really sure how to do it.
What is a tax deduction?
A tax deduction is a certain dollar amount that you can deduct against your income to reduce the amount of money you’re going to owe taxes on. For example if you make $50,000.00, and you end up with $10,000.00 worth of tax deductions, then you will subtract your deductions and only have to pay taxes on $40,000.00, not $50,000.00. This can often even move you into a lower tax bracket, so you’re paying a lower percentage of tax on your earnings.
What is a tax credit?
Then, there’s what’s called a tax credit. Similar to a deduction, a tax credit will allow you to pay less tax, but they work in slightly different ways. A tax deduction is a way to reduce your overall taxable income so you pay a lower amount of tax as a percentage of your income. A tax credit reduces the amount of tax owing. Now I know that basically sounds like I just said the same thing twice, don’t worry about that, because for the purposes of this lesson the only thing you have to know is that both tax deductions AND tax credits exist, and that you should be aware of using both of them to reduce your overall tax liability, which is financial speak for how much tax you have to pay.
How tax deductions work, an example
So, let me show you how tax deductions and credits can be used to reduce your tax burden. For the purposes of this exercise let’s say you make $60,000.00 a year, that’s your salary. If your salary is $60,000.00 you will fall into a 20.5% tax bracket. You will be taxed 15% on your first $49,020.00 of income, and 20.5% on the next $10,980.00. In total you will end up paying around $9603.90 in tax. That means your after tax income will actually be closer to $50k a year, not $60k. NOW, if you use tax deductions and credits, let’s say you’re eligible for $15,000.00 in tax deductions (this is a much higher number than what you can reasonably expect to deduct), that would mean that instead of reporting your taxable income as $60,000.00, now your taxable income is only $45,000.00, which means you’re only paying 15% tax on $45,000.00 so now you only owe $6,750.00 in tax. Which in turn means you actually have $53,250.00 that year. That means you will be saving several thousand dollars in tax that year by using deductions!
So just to run through it again, tax deductions and tax credits are used to reduce your overall income, so you have to pay less tax, and therefore you end up with more money in your pocket that you get to keep each year. So, why wouldn’t you take advantage of this. A lot of people don’t use this system to the fullest though because they just don’t know how it works if they do their own taxes, OR they don’t know what type of information to communicate with their accountant if they pay to have their taxes done for them. So, next up I’m going to walk you through 10 common types of tax deductions you may not be taking advantage of.
1. Donations.
Not only are you doing something good with your money, you’re probably eligible to claim your donation as a tax credit. Not all gifts or donations count towards this though, so ask if you can get a donation receipt. The CRA website is also very detailed and full of great information so you can check up on if something is eligible as a tax credit, or just call them, they’re super helpful and not at all scary!
2. The first time homebuyer’s credit.
If you bought your first home in the past year, you can claim a $5,000.00 credit on your taxes that year. This translates into a rebate of $750.00, which isn’t a tonne, but hey, it’s $750.00 back in your pocket after shelling out for your first home! Definitely a nice little perk.
3. Medical expenses.
Thank goodness we live in Canada and lots of our medical expenses are covered, but there’s a whole range of medical expenses you can claim if they apply to you. Now I’m definitely NOT going into this one in detail because it is complicated as hell, but basically if you incur any sort of medical related expense it’s worth checking the CRA website to see if you can claim it. A big one to know if you’re not on some sort of dental plan with your work is that you can claim a lot of dental services. Awesome!
4. Work costs like union dues.
If you’re not self employed you may not have known that you can write off a lot of work costs that you have to incur in order to continue with your profession. This one is a slippery slope concerning what’s eligible and what isn’t, so again, check the CRA website, but for example you may be able to claim fees you need to pay to unions, safety boards to continue your practice, travel and parking expenses, all sorts of things fall into this category that you can write off.
5. Student loan interest.
This is an awesome write off if you’ve used student loans to complete your education. It’s important to note that this write off can carry forward for 5 years. So, if you’re a student and not making much if any income, it’s probably not worth it to write it off right away. Instead, save the write off for when you start earning money, presumably that will be within the next 5 years, and then you can use this write off to reduce your taxes.
6. Child care deduction.
Again, this one can be complicated, and I don’t really want to unpack this for you here, but the important part is to note that you can write off a lot of childcare expenses on your taxes. So if you have a child, or if you’re the primary caregiver of a child, chances are you should be saving some receipts so you can write it off. Again, look at the CRA website to find out what expenses are eligible here.
7. Home office expenses!
This one’s for you all you new work from home people. Chances are this whole pandemic situation has put you in the position to claim some work from home expenses against your income this year. Now there are already some solid restrictions on this because the government realized it was going to be a free for all of people trying to claim new ergonomic sofas and office plants on their taxes, but there are still some good write offs you can take advantage of. The Canadian government has introduced a new ‘flat rate system’ just for 2020, which says if you meet the right work from home criteria you can claim up to $400.00 on your taxes this year. There’s a bunch more information about this, so I’ve linked the CRA webpage explaining this one in the description for this episode so you can check your eligibility and expenses yourself.
8. Tuition Fees.
If you’ve spent more than $100.00 in the past year on tuition fees, or certification and examination fees from an eligible post secondary education institution, then you can claim that in your taxes. If you’re not sure, just call your institution, or the CRA. They’ll help you sort it out.
9. Moving expenses.
This is a cool and unexpected tax deduction area. Sometimes you can claim moving expenses on your taxes. Specifically, if the new place you moved to is at least 40km closer to your new place of work or business, then some of those expenses can be claimed. While this may not be that useful right now, it might come in handy if during the pandemic you decided to move somewhere else, but then your office decides to call you back to office work and you need to move back, then you can claim some of that as a silver lining.
10. RRSP Deductions
Finally my favourite tax deduction is the RRSP deduction. RRSP stands for Registered Retirement Savings Plan. It’s a type of bank account that’s known as a ‘tax advantaged account’. You’re allowed to contribute a certain amount of money to this account every year and defer your tax payments on this amount of money, aka not have to pay taxes on that money. So you can claim it against your income and pay less taxes. Essentially what it is is that the government has decided that it’s SO valuable for Canadians to start saving for their own retirement, that’s it’s devised what’s essentially a cash back reward for saving that money in your RRSP account. It’s to your advantage to maximize how much you save in your RRSP account every year, because you’re killing two birds with one stone by both paying future retirement you, AND saving current you several thousand dollars in taxes every year. If you’re not contributing to an RRSP account, and if there’s any way for you to make sure you have some extra cash to contribute to the account each year, this is definitely a tax deduction you should be taking advantage of.
The Importance Of Saving Your Expense Receipts
One really important point about deductions is you need to have a receipt to act as proof. You can’t just expect the government to take your word for it that you paid $500.00 out of pocket to travel for your job this year. You need to keep receipts (credit card statements do not count) and you want to keep them accessible and organized for the future in case you get audited years later and need to prove that the deductions you’ve claimed are real. So, keep your receipts.
The Benefit Of Hiring An Accountant To File Your Taxes
And finally if this is all making your head spin I recommend hiring an accountant to file your taxes for you. This is not just for rich people. It may feel like a luxury to hire an accountant as opposed to paying the basic turbo tax fee, but the fact of the matter is that if you get a good accountant, and if you communicate properly with them, they will end up saving you way more in tax dollars than what you’ll have to pay them, so you still come out ahead in the end. Again though, you have to communicate with your accountant. You can’t just send them your T4 slips and expect them to then ask you about things like tuition expenses, or childcare expenses. It’s still up to you to have a basic grasp of the write off process, so that you can help your accountant know what areas of your life to look at for write offs. Cool? Even if you hire an accountant, you’re never fully off the hook for looking out for your own financial well being.
So! There you have it! A breakdown of what exactly tax deductions are in Canada, why you should definitely be using them to your advantage and saving yourself money, and 10 potential tax write offs for you to explore more this tax season to see where else you can save.
Linked Resources
Join the FREE personal finance basics course offered by the How To Adult School: The 7 Day Make Friends With Your Money Icebreaker Challenge.
Pick up a copy of The Wealthy Barber if you’re looking for a great book to get a handle on your personal finances.
CRA Web Page that lists different tax deductions and credits
CRA Web Page that covers the home office expense deduction
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