How to lower your tax bill using tax deductions and tax credits

With tax season looming in Canada, the question on everyone’s mind is how to lower taxes owed. Fortunately, there are many opportunities to offset your taxes owed. In this guide, you can find a list of commonly used tax deductions and tax credits that can reduce the amount you owe on your taxes.

How to lower your taxes owed

You can reduce your total tax bill using tax deductions and tax credits. A tax deduction is a reduction of taxable income. The lower your taxable income, the less tax you pay. A tax credit is a reduction of your tax payable. Tax credits are applied to your tax bill after your total taxes have been calculated. You can learn more about how to lower your taxes through the tax deductions and tax credits listed below.

Note there are other ways of keeping your tax bill low through various tax benefits. For example, controlling the tax bracket you’re in, using TFSAs and RRSPs and so on. However, these strategies are outside the scope of this article.

Tax deductions in Canada

Below is a list of tax deductions with information on how to maximize each tax deduction:

1. RRSP contributions

A registered retirement savings plan (RRSP) allows Canadians to save for retirement and lower the amount of tax they owe. The amount you contribute to your RRSP will be deducted from your taxable income, which means you will pay less tax.

RRSP contributions can serve as intentional tax planning or as immediate tax relief. Most Canadians who regularly earn an income open an RRSP and begin to contribute funds for retirement. You’re allowed to contribute to your RRSP for the first 60 days of the calendar year and apply those contributions to the previous tax year.

2. Childcare expenses

If you are a parent, you’re allowed to deduct childcare expenses against your income. In households with more than one parent, childcare expenses must normally be deducted from the parent who earns the lowest income. The basic limit for childcare expenses is as follows:

• Eligible children born 2012 or later: $8,000
• Number of eligible children born 2002 to 2011: $5,000

• More on eligibility

  An eligible child must be under 16 years of age at some point in the year. The age limit does not apply if the child has an impairment or physical/mental function and is a dependant. An eligible child is defined as follows:

  • Your or your spouse’s or common-law partner’s child
  • A child who was dependent on you or your spouse or common-law partner, and whose net income in 2020 was $13,229 or less

  Eligible childcare expenses are any costs paid to another person to look after an eligible child that allows the parent to do the following:

  • Earn income from employment
  • Carry on a business
  • Attend school
  • Carry on research or similar work that a grant was received for

3. Moving expenses

If you relocated for a new job or to attend school, you can deduct certain moving expenses. To be eligible, you must be at least 40 kilometres closer to your new place of employment or education.

Eligible moving expenses include the following:

• Vehicle expenses, accommodations and meals for you and your family
• Fees incurred to change addresses on documents, such as a driver’s licence
• Cost of utility hookups and disconnections
• Title transfer costs for your new property

4. Home office expenses

Home office expenses have always been a tax deduction; however, the way it’s applied has changed since the pandemic. Since millions of Canadians shifted to a work-from-home environment, the CRA launched a simplified method of calculating home office expenses. The prior method, called the detailed method, is still available for use. Currently, taxpayers can choose either option if they work from home and are an employee. Let’s explore both options below.

Detailed method

The detailed method applies to both employees required to work from home and employees who shifted to remote work due to the pandemic. The detailed method requires the taxpayer to keep records of home office expenses they incurred. This allows them to report the exact amount of expenses paid. Note that you must separate costs related to your personal and employment use.

To claim home office expenses on your tax return under this method, you must complete Form T2200S/T2200 and have it signed by your employer.

• More on eligibility

  Eligible home office expenses include the following:

  • Utilities, including electricity, heat and water
  • Home Internet
  • Maintenance and minor repairs
  • Rent
  • Home insurance (commission employees only)
  • Property taxes (commission employees only)
  • Lease costs of assets related to earnings (commission employees only)

  Non-eligible home office expenses include the following:

  • Mortgage interest
  • Mortgage payments
  • Home Internet connection fees
  • Furniture
  • Capital expenses
  • Wall decorations

Temporary flat rate method

The flat rate method is the new tax deduction introduced because of the pandemic and the shift to remote work. To qualify, you must have worked from home for at least 50% of the time for 4 consecutive weeks. You can claim $2 per day for each day worked, up to a maximum of $400 (or 200 work-from-home days). You are not required to complete Form T2200 or keep documents under this method.

Tax credits in Canada

Tax credits reduce your tax liability after your owed amount is calculated. In Canada, tax credits are either refundable or non-refundable. A refundable tax credit means you will receive the credit even if your tax owing is $0. A non-refundable tax credit is applied against your tax balance but if you don’t owe tax, a non-refundable tax credit won’t benefit you.

Below is a list of commonly used, non-refundable tax credits in Canada:

• Basic personal. This tax credit is designed to protect individuals living below the poverty line. In other words, you can consider the first $12,000 of your income tax free because of this tax credit. Every Canadian is entitled to claim the basic personal amount. For 2021, the amount is $12,421 and in 2020 it was $12,298.
• Spouse or common-law partner amount. If you support your spouse or common-law partner and their income was less than the basic personal amount, you can claim this tax credit.
• Age amount. If you’re over the age of 65 in the current tax year, you can claim this tax credit.
• Eligible dependants and caregivers. If you support an eligible dependant and/or are a caregiver, there are various tax credits you may be eligible to claim.
• Canada employment amount. If you reported employment income, you’re eligible for this tax credit.
• Home buyers’ amount. If you purchased a home, you’re eligible for this tax credit. A qualifying home is a property located in Canada that is registered in your name or your spouse/common-law partner’s name.
• Education tax credits. Your tuition, education and textbook amounts are eligible.
• Interest on student loans. If you paid interest on your student loans, you’re eligible for this tax credit.
• Disability amount. If you live with a disability and are eligible, you can claim this tax credit. There is an additional amount if you’re under the age of 18.
• Medical expenses. Certain medical expenses are eligible for this tax credit.
• Donations and gifts. If you made a gift of money or other property to registered charities and institutions, you’re eligible for this tax credit.

Helpful strategies for tax season

• Keep receipts. In general, you should keep records of everything you earn and spend. When tax season rolls around, it’ll be easier to make calculations and have documentation for credits and deductions. As you better understand the Canadian tax system, you’ll know what to save and what to toss.
• Read the annual tax guide. Every year, the CRA slightly adjusts how Canadians are taxed. But overall, the Canadian tax system doesn’t change much. If you read the annual tax guide each year, you’ll get better at understanding the system, filing your own taxes and tax planning.
• Tax planning. If you’re going to school soon or selling a large asset in the near future, you should plan your taxes accordingly. This can help you estimate how much you owe and identify opportunities to reduce your liability sooner.
• Hire a professional. Complex tax issues can arise that may be too difficult for you to navigate on your own. If you need help, consider hiring a professional. There are many who do tax returns for an affordable fee.

Bottom line

Tax benefits like tax credits and tax deductions can help lower your taxable income and taxes payable, as long as you know what’s eligible. Each time you complete a tax return, the better you’ll be at reducing your tax liability. If you’re ever stuck in the process, consider hiring a tax professional to assist you.

Frequently asked questions

• What are tax benefits for married couples in Canada?

  In Canada, married couples are eligible for the spousal tax credit. If the married couple has children, they’re also eligible to deduct childcare expenses. In addition, they may be eligible for additional tax credits depending on their child’s circumstances. For example, if their child is a dependant or pursuing post-secondary education, they may be eligible for additional tax credits.

• What are tax deductions for homeowners in Canada?

  When you purchase a home, you are eligible for a home buyer’s tax credit in that year. If you purchased a new home as a result of a move for employment or education purposes, you may also be eligible to deduct moving expenses.

• How do I calculate tax deductions?

  Before you can calculate tax deductions, you must calculate your taxable income first. This is done by identifying and summing all of your income earned in the year. This could be employment income, business income, investment income and so on.

  From there, you can begin to reduce your taxable income through tax deductions. There are many tax deductions available to you, but the main ones are RRSP contributions, childcare expenses, moving expenses and home office expenses. Once all these deductions are made, you’ll have your final taxable income amount.