Tax Deductions: How to Save Money By Claiming Them

Tax Deductions: What They Are, How to Claim

Tax deductions are a way to reduce your taxable income and, consequently, your tax bill. You must meet eligibility criteria to claim a tax deduction.

Woman seated at her desk reviewing receipts and tax documents to claim a deduction.

If you’re looking to reduce your income tax bill — and who isn’t? — one way to do it is by taking advantage of as many tax deductions as possible.

A tax deduction, sometimes referred to as a tax write-off when discussing business expenses, is a specific expense that can be subtracted from your taxable income.

Lowering your taxable income means you’ll pay taxes on a smaller amount and can even put you in a lower tax bracket. In Canada, both federal and provincial deductions can help reduce your tax liability.

Common tax deductions in Canada

Some frequently used deductions that will reduce your taxable income may include:

Contributions to a registered pension plan you have through an employer.
Canada Pension Plan enhanced contributions on employment income.
Registered retirement savings plan (RRSP) 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 or child support.
Moving expenses related to work, starting a small business or attending full-time post-secondary education, as long as you moved at least 40 km.

How to claim a tax deduction

When you fill out your tax return, you must enter a variety of information on specific lines of the T1 General form, or in response to specific questions from your tax software. Line 10100, for example, is for your employment income, such as your salary, wages, bonuses and tips. You’ll find this amount in box 14 of your T4 from your employer.

You also have to report other income from sources like self-employment, pensions, investments and government benefits on other lines. Then you’ll add up all your income for the year to get your total income, which goes on line 15000 (if you’re using software, it will do this calculation for you).

Next, you’ll find a series of deductions (from approximately line 20600 to line 25600) 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 union or 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.

After calculating your net income, you may still be eligible for a few more deductions that you can claim to reduce your taxable income 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, exempt foreign income and a Canadian Armed Forces personnel deduction.

Once you’ve subtracted the applicable deductions from your net income, you will arrive at your taxable income, which is line 26000 of your tax return.

🤓 Nerdy Tip: In order to take full advantage of tax deductions, you have to know what’s available and whether you qualify. The CRA has a list of all deductions, credits and expenses you can claim on your tax return — or you can consult with tax prep professional. Free tax clinics may be a way to get extra help if you need it.

Self employment deductions

If you’re self-employed, you can deduct certain expenses you incur to earn your income. Deducting these expenses, including business costs like advertising, bank fees, insurance, office supplies and home office expenses, reduce a self-employed person’s taxable professional income.

You’ll include your gross self-employment income and net self-employment income (after deducting eligible expenses) on your tax return. Then you can use the personal deductions mentioned above to reduce your taxable income further.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. Most tax software also walks you through the process of adding deductions by asking you questions about your income and expenses.

No, tax deductions and tax credits are different, and perform different functions. Tax deductions apply to your taxable income, lowering the amount you’ll be taxed on. For example, RRSP contributions are tax-deductible, so they reduce your taxable income. Tax credits reduce the amount of tax you owe, and some can even help you qualify for a tax refund. Making an eligible charitable donation can allow you to claim a tax credit.

Mortgage interest is only deductible if you use your property to generate rental, professional or business income. However, this type of deduction is complex.

For rental income, the process varies based on factors such as whether you rent out the whole home or just a portion, and whether you do long-term or short-term rentals (such as Airbnb).

If you’re self-employed and work at home, you can deduct a portion of your mortgage interest as part of your self-employment expenses. The portion is based on the size of your workspace compared to the total area of your home, or by the amount of time you use the space for business purposes.