If you’re looking to reduce your tax bill (and who isn’t?), one of the most crucial things to pay attention to is tax deductions. From moving expenses to child care, tax deductions can help make tax time much more affordable.
What is a tax deduction?
A tax deduction (sometimes referred to as a tax write-off ) is any legitimate item you can claim on your taxes that lowers your taxable income and therefore reduces the amount of tax you have to pay. In Canada, both federal and provincial deductions can help reduce your tax liability.
» MORE: How does income tax work?
How tax deductions work in Canada
Deductions are an incredibly important part of the tax process. When you lower your taxable income, you reduce the amount of tax you pay overall because Canada’s federal and provincial tax rates are based on your taxable income, not your total income.
The goal is to use deductions to reduce your total income as much as possible to arrive at your taxable income. The more deductions you can use, the less taxable income you will have and therefore the fewer taxes you’ll pay overall.
» MORE: Do you know your tax bracket?
How to claim a tax deduction
In Canada, when you fill out your tax return, you must enter a variety of information on specific lines of the T1 General form. Line 15000, for example, is for your total income from all sources (including paid work, self-employment, pensions, investments and government benefits).
Once you’ve calculated your total income, what then follows (from approximately line 20600 to line 23500) is a series of possible deductions you can subtract from your total income to arrive at your net income. Deductions may include things like child-care expenses, moving expenses and professional dues, to name just a few. Once you’ve subtracted all your eligible deductions from your total income you will arrive at your net income, which is line 23600 of your tax return.
Once you calculate your net income, there are a few more deductions you may be eligible to claim to reduce your income even further. Deductions from your net income are listed from line 24400 to line 25600. These deductions are more limited in scope and will not be relevant to most Canadians. They include northern residents deductions, limited partnership losses and a Canadian Forces personnel deduction. Once you’ve subtracted any other deductions from your net income, you then arrive at your taxable income, which is line 26000 of your tax return.
Common tax deductions in Canada
Some frequently-used deductions that will reduce your taxable income include:
- Registered pension plan. If you contribute to a registered pension plan through your employer, you can deduct your contributions from your income.
- Employment Insurance premiums and Canada Pension Plan contributions can be deducted.
- Registered Retirement Savings Plan (RRSP). You can deduct the money you put towards an RRSP or a spousal RRSP.
- Union or professional dues. You can claim a deduction for some eligible dues.
- Child-care expenses resulting from earning a living or going to school may qualify as an eligible deduction.
- Support payments, like spousal support, may be eligible.
- Moving expenses. If your move was related to work, opening a business or furthering your education, you might be able to claim the expenses as deductions.
Tax deductions for self-employed Canadians
Some deductions are exclusive to individuals who qualify as self-employed. These deductions, including business costs such as advertising, bank fees, interest accrued on a business credit card, office supplies and home office expenses, reduce a self-employed person’s overall professional income. After calculating total income ( including net professional income after deducting expenses), self-employed taxpayers can use the personal deductions mentioned above to reduce their taxable income further.
Note that some work-from-home expenses (like a portion of utilities and minor home repairs) were allowed for many employed Canadians in the 2020 tax year because so many people were forced to work from home due to the COVID-19 pandemic. It remains uncertain whether similar deductions will be available on the 2021 tax return.
If you are uncertain what deductions you might qualify for, it’s wise to consult a professional tax expert or accountant or visit the CRA’s website.
Tax deductions vs. tax credits
A tax deduction reduces your taxable income, and a tax credit reduces the amount of tax you pay on your taxable income. Tax credits can vary by province and territory, and examples include medical expenses and donations you made to registered charities.
Is mortgage interest tax deductible?
Mortgage interest is only deductible if you use your property to generate income (such as a rental). However, that deduction is complex, and the process varies based on factors such as the rental agreement and how long it takes you to repay the mortgage.
For this reason, unless you’re very comfortable doing your own taxes, it may be best to consult a professional regarding how to go about deducting mortgage interest payments on your tax return.