Are you paying more tax than you need to?

By Brenda Spiering, Editor, Marketing and Communications Manager, Client Solutions, SunLife Financial

What you can deduct

Deductions from income and tax credits are reported on lines 206 to 485 of your income tax return. So, take some time to review them carefully. There may be steps you can take to maximize the amount you can claim.

For example, you have until March 1 (or a day or two later, if March 1 falls on a weekend) to top up Registered Retirement Savings Plan contributions that can be claimed as a deduction for the previous year. And claiming a tax deduction can often mean getting a refund come tax time.

The same is true of tax credits. Taking some time to pull together all of the required receipts to claim eligible credits can mean significant savings.

What’s the difference between claiming a tax deduction and a tax credit?

Tax deductions

Tax deductions reduce the overall amount of tax you have to pay by reducing your annual income. That’s because they’re subtracted directly from your annual earnings.

For example, if you’re a salaried employee, you’ve likely had tax deducted all year from your paycheque based on your estimated annual income. By contributing to an RRSP and effectively reducing your income, you may end up in the position of having paid more tax than necessary and qualify for a refund.

Just remember, says the Million Dollar Journey blog, “If you’re getting a big tax refund at the end of the year, that money was basically an interest-free loan to the government.” A better approach is to make regular RRSP contributions and get your employer to reduce your tax payments at source.

Also, while you get a tax break on your contributions to an RRSP, you will be taxed on your withdrawals. This works well if you expect to be in a lower tax bracket in retirement (or when you draw the money out) than you’re in now. If not, you may want to consider contributing to a Tax-Free Savings Account instead.

Tax credits

Tax credits fall into two categories, non-refundable or refundable:

  • Non-refundable tax credits (such as eligible tuition expenses) are applied directly to your tax bill to reduce the amount of tax you owe. They are not paid out directly. You must owe tax in order to claim them.
  • Refundable tax credits (such as the federal GST/HST Tax Credit) are government tax refunds. They are paid out automatically, often in a series of payments throughout the year, to anyone who files a tax return who qualifies.

More details on non-refundable and refundable tax credits are available from The Financial Consumer Agency of Canada.

For more information on what you can deduct and where to report tax credits and deductions, visit the Canada Revenue Agency.

Original Source: Are you paying more tax than you need to, By Brenda Spiering, Marketing and Communications Manager, Client Solutions,SunLife Financial

©Sun Life Assurance Company of Canada, 2013

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This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.