Deductions vs. tax credits

A deduction takes a slice off your income

An RRSP deduction is the most familiar example. What it saves depends on which tax brackets the slice comes out of. If the whole deduction sits in one bracket, multiplying by that rate gets you close; a larger one may span two.

Example: three meanings of $1,000

Say your marginal rate is a flat 30%. A $1,000 deduction lowers your tax by $300. Now say a credit is 15% of a $1,000 eligible amount: it's worth $150. And a credit already worked out as $1,000 lowers your tax by $1,000, if you owe that much.

These are three separate cases, not claims to add together, and the 30% and 15% rates are made up. Real credits can have tiers and limits, and deductions can also change benefits that depend on your income.

Refundable or non-refundable

A non-refundable credit can only lower your tax to zero. A refundable credit can be paid to you even if it's more than your tax, as long as you qualify. Neither word tells you whether a deduction is allowed or which amount to claim.

Questions to ask about any claim

What does it lower, your income or your tax? What's the eligible amount, what rate applies, and is there a limit? For donations, use the donation credit rules; a gift isn't deducted from your income like an RRSP contribution.

• Find the right line on the return for the right year.
• Don't confuse the eligible amount with what it saves you.
• Check that you owe enough tax to use a non-refundable credit.