Tax deduction

What a deduction does

A deduction reduces the income your tax is based on. The CRA lists deductions and credits as separate groups, and the order matters: deductions in the first group lead to net income on line 23600, a second group leads to taxable income on line 26000, and credits are applied to the tax calculated from that taxable income.

Because a deduction removes income, the value of a dollar deducted depends on the bracket it comes out of. A credit, by contrast, is set by its own rules. That is why a deduction usually saves more for someone in a higher bracket.

Common personal deductions

Examples the CRA lists include the RRSP deduction, the FHSA deduction, child care expenses, moving expenses, carrying charges and interest paid to earn investment income, and the capital gains deduction. Each has conditions: contribution room, who may claim, what is excluded and what proof you must hold.

Some items people expect to deduct are excluded. For instance, the CRA does not allow fees you paid to manage an RRSP, TFSA or FHSA as carrying charges, or interest on money borrowed to contribute to them. Check the line instructions rather than assuming.

An illustrative example

Suppose someone has $80,000 of income and a $10,000 RRSP deduction. Their net income becomes $70,000, and tax is calculated on that lower amount. If instead they had a $1,000 credit, their income would stay at $80,000 and the credit would reduce the tax calculated. The numbers are illustrative only and do not describe any real person’s result.

Records and timing

Keep receipts, contribution slips and the calculations behind each claim, because the CRA can ask to see them later. Some deductions can be carried forward or claimed on a different return than the year of payment, while others cannot. Confirm the timing rule for each one before you decide to skip a claim.

What to discuss with your accountant

Ask which deductions you are eligible for, whether to claim now or carry forward, and which paperwork you still need. Bring last year’s notice of assessment and any slips or statements that show eligible amounts.