The federal and provincial governments of Canada uses income tax deductions in other to reduce the tax for some taxpayers as well as to promote certain activities considered to be beneficial. See more information on Personal Income Tax Deduction.
Most deductions reduce the amount of tax directly while others reduce the income subject to tax. As a taxpayer, you should understand all the deductions that are available in other not to over pay.
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What You Can Claim On Your Tax Return
To calculate your due tax, add up your income from all sources. You may be able to deduct expenses from certain types of income, that is if the expenses represent costs necessary to create the income in the first place.
- For capital gains declared on Schedule 3, it is possible that to have costs or exemptions that you can deduct.
- For investment income declared on Schedule 4, you normally have carrying charges and interest deductions.
- You will be required to fill out Form 2125, Statement of Business or Professional Activities, and deduct your business-related expenses from your income. This only happens when you earn income from being self-employed of any business, as a professional, from a farm or from a fishing operation
If money is misplaced from any of these activities, you can sometimes deduct the loss from other income.
Deductions That Reduce Taxable Income
After calculating your total income, deductions can then be taken. The Canadian Governments do not charge income tax on some of your income and allow you to subtract other amounts, such as RRSP contributions.
For instance, You can deduct money spent on child care and expenses related to employment including moving costs if you change jobs. Your net income will be, your total income minus these deductions.
Due to some special circumstances, there are a few items you may be able to deduct from the net income. For example, you could deduct losses from previous years and an amount if you are a northern resident.
The best way to claim deductions of this type is to go through your income tax form line by line.
If you don’t understand how to identify a deduction, look at the guide for the line number next to the deduction. The guide explains how to claim the deduction and whether you are qualified to claim it.
Deductions That Reduce Income Tax
The Canada Revenue Agency (CRA) allows you to deduct amounts from the tax that you owe which depends on your taxable income. These calculations can be carried on Schedule 1.
Deductions include the basic personal amount that every taxpayer can use, and amounts for a spouse, age bracket and dependents if you qualify. There are numerous possible deductions on Schedule 1 and, while many represent small amounts, they can add up to substantial savings.
Most common overlooked deductions include student loan interest, medical expenses, and public transit passes.
Non-refundable vs. Refundable
Non-refundable is tax deductions that reduce your taxable income, or amounts you can subtract from your tax due. This simply means you can use the deductions to reduce your tax payable to zero, but you can’t claim a refund based on these amounts.
Refundable tax credits, as the name implies, result in a refund. Usually, you have already paid some income tax, either through salary deductions or via installments paid during the year.
To these amounts, you can equally add any over payments you made on employment insurance or the government pension plan.
The Working Income Tax Benefit is a very good example of a refundable tax credit. You could receive a refund when the total of these amounts is more than the amount of tax due, or if there is no tax due because the deductions have reduced it to zero.
You can also see how the Canadian tax return works