Doing your taxes is a lot like going to the dentist — it’s not something you look forward to and it can be pretty painful at times.
No one wants to pay the government more taxes than they need to, yet every year many Canadians do just that by not taking full advantage of available tax credits. In this post I’ll explain what tax credits are — and share which ones are often underutilized.
What are tax credits?
Tax credits are given by the government to help reduce the amount of taxes you pay on your taxable income.
These credits are given to help low-income earners maintain a basic standard of living and to encourage both businesses and individuals to help the government carry out some of their initiatives. A good example of this would be the temporary Ontario Staycation Tax Credit for 2022 which provides a tax credit for families who keep their tourism dollars in Ontario, thus helping the tourism and hospitality who were adversely affected by the COVID-19 pandemic (so if you do any traveling in Ontario this year, be sure to keep your receipts).
How are tax credits different from tax deductions?
Both tax credits and tax deductions reduce the amount of tax you pay, but how they reduce your taxes differs.
A tax deduction, say for charitable donations, reduces your taxable income (which determines your tax liability) while a tax credit reduces your actual tax owing, dollar for dollar. And depending on whether the tax credits are refundable or non-refundable, you could even be eligible to receive a refund.
Both tax credits and deductions come with specific requirements which you must satisfy in order to claim them on your taxes.
What’s the difference between refundable tax credits and non-refundable tax credits?
Non-refundable tax credits can reduce your tax liability to zero — but not beyond. You won’t be entitled to a tax refund even if the credit is larger than the amount you owe.
A refundable tax credit, on the other hand, can provide you with a cash refund even if your tax payable is zero. Both are available to all eligible Canadians, so it’s important to file a tax return, even if you don’t anticipate owing taxes.
Are you missing out on these tax credits and deductions?
In my experience, not claiming the Disability Tax Credit and confusion around what constitutes a ‘medical expense’ are deductions that are often overlooked and can affect your tax liability.
Disability Tax Credit
One of the most underutilized tax credits I’ve seen over the years is the Disability Tax Credit. If you are living with daily challenges — even if you don’t consider yourself “disabled” — talk to your doctor about it, as they may be able to help you apply for this credit.
Eligibility for the credit is determined by the severity of the impairment and how it affects your ‘activities of daily living’, not by your diagnosis. For the purposes of the credit, a ‘disability’ could include physical, mental or neurological impairment, so it’s definitely something worth looking into.
Deduction for medical expenses
Many people are also not claiming their full deduction for medical expenses. The amount you pay to a health insurance plan (unless it’s paid by your employer), is considered a medical expense and can be included as a deduction on your tax return along with other out-of-pocket medical expenses.
Eligible expenses can also include the extra money spent on special foods (such as gluten-free items) if recommended by your doctor for health reasons.
In addition, if you are one of many Canadians who were forced to work from home during the pandemic, the $2 per day flat rate deduction introduced last year is available for the 2021 tax season as well (up to a maximum of $500). So if you’re working from home, make sure you take advantage of this deduction too.
This is not by any means the full list of credits and deductions available to you, but these are the ones that are commonly missed.
Credits and deductions for small business owners
I’m sure you’ve heard about people ‘writing off” lunches and vacations as a business expense, and in some cases, they would be correct in doing so — such when the lunch or vacation in question was for the express purpose of conducting business (see the CRA’s website for allowable business expenses)
Here are some of the more common ones:
- Deducting a portion of your rent, utilities and other household expenses from your home-based business.
- Vehicle expenses (note: driving to and from work is not considered a business expense, but gas, insurance and vehicle upkeep are — even car washes).
- If your small business undertakes research and development, there are some big credits available. Make sure you’re not missing out on this, because the credit could be substantial.
- Meals and entertainment. In addition to client meals, gifts and entertainment, you can host up to six company events per year that are fully deductible (provided the entire staff is invited).
- Advertising and promotional materials
- Charitable donations
The government also allows a Lifetime Capital Gains Exemption, which allows business owners tax-free money when they sell their shares in their business to another party. There are a number of qualifying factors, but it’s a great incentive for you to build up a business that has value.
There are many credits and deductions available, both federal and provincial. To make sure you’re taking advantage of all you are entitled to, it’s best to discuss this with a financial advisor.
If you don’t currently have an advisor, we’d be happy to set up a consultation with you. Tax time is just around the corner, so do what you can to keep your hard-earned money in your pocket — not in the government coffers.