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Tax Credits

Unlike a tax deduction, a tax credit does not reduce your taxable income. Instead, it comes into effect once the amount of tax you owe has been determined.

For example

Let's say you owed $10,000 in federal tax. If you had a $1,000 tax credit, you would simply deduct this amount from your federal tax payable, reducing it to $9,000.

With tax credits, your marginal tax rate doesn't come into play at all. Rather, a tax credit is worth the same in real dollars to everybody, regardless of their income level and tax bracket. As part of an effort to make the tax system more fair, the government has been converting many deductions into tax credits.

Here are two examples of working with tax credits and their associated benefits:

+ The value of Refundable and Non-Refundable Tax Credits

+ When a $1,000 Tax Credit is worth $1,500 or more!

Most tax credits are subtracted from the amount of basic federal tax you are required to pay. Since your provincial taxes and federal surtaxes are calculated on your basic federal tax, this means each dollar of credit can actually save you upwards of $1.50 in taxes!

(Your provincial taxes are calculated as a percentage of your basic federal tax, so the less tax you owe Ottawa, the less you'll have to pay your province. Provincial tax rates range from around 45 to 70 per cent of your federal tax bill. In addition, tax credits are subtracted from your basic federal tax before assessing your federal surtax, making your credits worth even more.)



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