If you’re looking to reduce your tax bill — and who isn’t? — one way to do it is by taking advantage of tax deductions.
A tax deduction, sometimes referred to as a tax write-off, is any legitimate expense that can be subtracted from your taxable income.
Lowering your taxable income reduces the amount of tax you have to pay. Ideally, multiple deductions will be used to decrease your income as much as possible. In Canada, both federal and provincial deductions can help reduce your tax liability.
» 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, you’ll find a series of deductions (from approximately line 20600 to line 23500) you can potentially 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 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.
» MORE: How does income tax work?
Common tax deductions
Some frequently-used deductions that will reduce your taxable income may include:
- Contributions to a registered pension plan you have through an employer.
- Employment Insurance premiums and Canada Pension Plan contributions.
- Registered retirement savings plan contributions, including those made to a spousal RRSP.
- Eligible union or professional dues.
- Child-care expenses resulting from earning a living or going to school.
- Support payments, like spousal support.
- Moving expenses related to work, starting a small business or furthering your education.
Tax deductions for self-employed Canadians
Some deductions are exclusive to individuals who qualify as self-employed. These deductions, including business costs like 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.
Some deductions related to work-from-home expenses were allowed for many employed Canadians in the 2020 and 2021 tax years because so many people were forced to work from home due to the COVID-19 pandemic. The government has announced that these deductions will be available for eligible taxpayers for the 2022 tax year as well.
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.
Frequently asked questions about tax deductions
Tax deductions and tax credit perform different functions. Tax deductions are used to reduce your taxable income. Tax credits reduce the amount of tax you pay on your taxable income. RRSP contributions are tax deductions. Charitable donations are tax credits.
Mortgage interest is only deductible if you use your property to generate rental, professional or business income. 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.
If you’re able to claim them, tax credits can reduce your overall tax bill. Find out which tax credits might apply to your personal and financial situation.
There are several taxes self-employed business owners and freelancers must pay in Canada. Plan to set aside 25%-30% of your annual income to pay them