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A Case Study on Reducing Your Tax Liability by Claiming Deductions and Credits

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    A Case Study on Reducing Your Tax Liability  by Claiming Deductions and Credits

    What is the difference between a tax deduction and tax credit? While both result in paying less taxes, the difference can be boiled down to this: a tax deduction reduces the income subject to tax—your “taxable income”—while a tax credit reduces the amount of tax that you owe directly.

    Let’s look at a case study to see how the following taxpayer can reduce his tax liability by applying tax deductions and credits.

    tax liability

    We’ll begin by looking at the tax liability of a taxpayer living in Ontario who earns a salary of $60,000, prior to applying any tax deductions and credits.

    Let’s look at the federal and provincial breakdown:

    If he earns $60,000 in income in Ontario, he will owe the following:

    Federal taxes:

    15% on the first $47,630 (i.e. $7,144.50) and another 20.5% on the rest (i.e. $2,535.85) for a total tax of $9,680.35 federally; and;

    Provincial taxes:

    5.05% on the first $43,906 (i.e. $2,217.25) and another 9.15% on the rest (i.e. $1,472.60) for a total tax of $3,689.85 provincially.

    Therefore, a taxpayer earning $60,000 in Ontario will have to pay a total of $13,370.20 or 22 percent of his earnings in tax.

    Let’s try to lower this tax burden by applying some deductions and credits.

    Looking at possible deductions first, if our taxpayer spent $12,000 in child-care expenses, he will have reduced his taxable income from $60,000 to $48,000. Next he can apply his moving costs (including transportation, storage, movers, and meals) of $8000 to work closer to home (as long as the new home is at least 40 km closer to work than before), $6000 in RRSP contributions, and $4000 in medical expenses.

    His total deductions, which include child-care costs of $12,000 for two children, moving costs of $8000, RRSP contributions of $6000 and medical costs of $2,500, will have reduced his taxable income from $60,000 to $31,500.

    How much tax will he owe now?

    Applying federal and provincial tax rates, the taxpayer will now owe 15% of $31,500 federally (i.e. $4,725) and 5.05% on $31,500 provincially (1,590.75) for a total of $6,315.75.

    Using deductions alone, he has now saved $7,054.45 in taxes—when comparing the $13,370.20 in taxes that he owed prior to the application of deductions and the $6,315.75 that he owes now after the application of deductions.

    Let’s try to get this $6,315.75 reduced further by apply some tax credits. In contrast to deductions, credits do not correlate to your income tax bracket. In Canada, all working individuals regardless of their income are entitled to apply a 15% tax credit federally, while each province has their own provincial rates for applying a tax credit. In Ontario, a taxpayer can apply a 5.05 percent tax credit.

    For example, if the Ontario taxpayer alluded to above were single and supporting a dependent under the age of 18, he would be eligible for a $2,264 tax credit; 15% of the federal based rate of $12,069 and 5.05% of the base provincial base rate of $8,985.

    For more information on all available tax credits in Canada, click here.

    Now, our fictional taxpayer, who previously owed $6,315.75 in taxes can reduce it further by $2,264.09 for a total tax liability of $4,051.66.

    What is more, our taxpayer may be entitled to a refundable tax credit if he paid more than $4,051.66 throughout the year in payroll source deductions and other deductions for employment insurance and pension plans (EI, CPP). The refundable tax credit he is entitled to represents the difference between what he already paid in source deductions and what he owes in tax.

    There is a lot that a taxpayer can do to lower or eliminate his tax liability. He may even be eligible for a refund. What your balance sheet looks like at the end of the year depends largely on knowing which deductions and credits you may be eligible for.

    Contact a tax lawyer at Kalfa Law to get the expert advice you need to ensure that you are not paying more tax than you need to. You work hard for your money. We work hard for you to keep it ™.


    I am worried that I did not claim the personal amount! What should I do?
    You likely did. The Personal Amount is claimed more-or-less automatically when Canadian residents file returns.
    Will I be able to claim moving expenses?
    Canadian-resident individuals can claim broadly-defined costs of moving for school or work where the move allows them to live 40 or more kilometers closer to the new place of work or study. There are other requirements, but the key question is whether they moved far enough.
    Can I claim the elevated personal amount for having a spouse or common-law partner?
    If you are married or live common law and support your partner, you may be able to claim the “Spouse or common-law partner tax credit” if you supported them in the year. This generally requires them to have been dependent on you for financial support.

    -James Alvarez, Tax Counsel

    © Kalfa Law 2020

    The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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