Everyone loves a tax refund, or at the very least, a reduction in their income tax bill. A strategy to enhance your potential for a refund is to ensure that you include or apply for every conceivable tax credit when you submit your tax return.
However, what exactly is a tax credit? Why are they referred to as “refundable” or “non-refundable”? And how do you notify the government of your eligibility for these credits to receive the rightful funds? In this guide, we will walk you through all the essential details.
What is a tax credit?
Tax credits lower your tax bill or put extra money in your bank account (or sometimes both!). They’re essentially a list of cases in which you can subtract money from the amount of tax you owe or claim extra money from the government. There are two kinds of tax credits: refundable and non-refundable.
Let’s recap briefly how income tax works in Canada. First, everyone is required to pay a percentage of the income they earn to the government. That percentage depends on where you live (different provinces and territories have different income tax rates) and how much you earn. Then, you can apply certain conditions that might lower your taxable income or the amount of income tax you have to pay, or even give you bonus cash. One category of these conditions is tax credits.
When you file your taxes, you basically fill out a big form that tells the government not just how much you earned but also how many of these tax-lowering conditions you’re a match for.
Tax credits lower the amount of tax you owe or might even mean you’re eligible to get back extra money. For instance, let’s say your total income tax owed for the 2023 tax year is $3,000, and your tax credits worked out to $500. Subtract those credits from the total income tax to get your tax bill for the year:
$3,000–$500 = $2,500
Whether this turns into a refund or simply a smaller bill depends on how much income tax you’ve prepaid for that year, either through paycheque deductions or installments you’ve made yourself.
What are refundable tax credits?
Refundable tax credits are credits you get (if you’re eligible) regardless of how much you’ve paid—or need to pay—in income tax. So, for example, if you qualify for the GST/HST (Goods and Services Tax/Harmonized Sales Tax) credit, which is a refundable tax credit, you will receive the total amount even if you didn’t pay any income tax for the year.
What are non-refundable tax credits?
Want to pay less tax? One totally legit way to do it is by using non-refundable tax credits. These credits reduce the amount of tax you have to pay—though unlike refundable tax credits, they can’t bring that amount below zero where you get paid the difference. For instance, if your total income tax payable for the year is $1,000, the maximum you can claim for the non-refundable tax credits is $1,000.
What are some examples of refundable and non-refundable tax credits?
There’s a whole menu of refundable and non-refundable tax credits available to Canadians—though unlike at a restaurant, you have to qualify for the ones you choose. Also, provinces and territories have different credits that maybe claimed. So make sure to do your homework to get the most you qualify for. Here are some examples.
Refundable tax credits
Refundable tax credits in Canada include the following:
The Canada Workers Benefit offers up to $1,428 to qualifying low-income Canadian individuals and up to $2,461 to qualifying low-income families. (The maximum will vary in Alberta, Quebec, and Nunavut.)
The CWB disability supplement, which is part of the Canada Workers Benefit, offers people with disabilities and their families up to an additional $737. (The maximum will vary in Quebec and Nunavut.)
The Eligible Educator School Supply Tax Credit gives qualifying teachers and early childhood educators up to $250 in tax dollars for eligible teaching supplies, if the $1,000 expenditure maximum is reached.
The Canada training credit will refund 50% of eligible education and training expenses. This credit has a lifetime limit of $5,000; for your personal limit for this tax year, check your most recent notice of assessment or reassessment.
Non-refundable tax credits
Non-refundable tax credits in Canada include:
The Basic Personal Amount is how much money a person can earn without paying income tax. For 2023, that amount was $15,000 for federal taxes.
The Home Buyers’ Amount is available to first-time home buyers. This tax credit was increased from $5,000 to $10,000 for 2022. Life partners who have purchased a home together can also share this credit.
The Digital News Subscription Tax Credit offers up to $500 for those who have purchased digital subscriptions to qualified Canadian journalism outlets.
The Canada employment amount lets you claim the costs of purchases you’ve made for work purposes, such as uniforms, computers and supplies. If you reported employment income in 2022, you can claim up to $1,287.
The tuition tax credit allows students to apply eligible education costs against their income tax payable.
The Volunteer Firefighters’ Amount allows you a $3,000 tax credit if you’ve volunteered at least 200 hours as a firefighter in the year (which we’re happy exists because seriously: thank you, volunteer firefighters).