The terms “Tax Deduction” and “Tax Credit” sometimes seem to get thrown around as if they’re interchangeable, but that’s not really the case. What is the difference between a “Deduction” and a “Credit”?
There is a distinct difference between the two terms and the way they’re communicated to the general public also has different spins to it.
A TAX CREDIT is a reduction of actual tax calculated and is based on a percentage of the tax credit amount itself. For example, individuals age 65 and over receive an Age Amount tax credit of $7,225 in 2017. In true dollars and cents, the Tax Credit is 20.05% (15% Federal and 5.05% Ontario) and results in a tax reduction of $1,448.61.
A TAX DEDUCTION is an actual reduction of taxable income – a true deduction therefore an individual with a tax deduction of the same $7,225 – say an RRSP – will reduce their income taxes by their marginal tax rate. In Ontario this can be as high as 53.53% which would equate to $3,867.54. This makes for a sizable difference.
So, generally speaking, a Tax Deduction is better to have than a Tax Credit. For a full list of the 2017 Tax Deductions and Tax Credit is available from Canada Revenue Agency.
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