FACT: We all pay tax. You, as a resident of Canada (or where ever you hail from), owe the government a certain percentage of your income. They use it to build roads, and heal the sick. That percentage is based on how much money you’re making (for more info on that check out: MARGINAL TAX RATES. But basically: the more money you make, the more you’re going to end up paying in taxes.
What is a Tax Credit and how do they work?
Tax credits are different from TAX DEDUCTIONS and infinitely more powerful. Unlike their more commonplace brethren “the deduction” which reduces the amount of income owing (decreasing the amount of income that you have to pay tax on), the credit works directly against the amount of tax you have to pay. You see? A dollar of deduction, means that you don’t pay tax on that dollar. A dollar of tax credit, actually means you pay one dollar less in tax! They are pretty awesome.
What counts as a Tax Credit?
Tax credits fall into two basic categories
- Non-refundable tax credits – they can only be used against the tax you owe. If the credit is more than the tax, you’re out of luck. They’re just for taking care of tax.
Examples include: credits from medical expenses, and charitable donations.
- Refundable tax credits – the creme de la creme. These tasty morsels still get paid to you whether you owe tax or not. So if it’s not applied to your tax bill, it’s sweet cash in your pocket.
Examples include: your HST/GST credit (that cheque that they send you every few months), a child tax benefit, or a refundable medical expense supplement.
Fun Fact: Here in Canada every one of us is entitled to a Basic Personal tax credit (non-refundable) which means that the first 11, 138 (2014 numbers) is tax free! Thanks Canada!