What is a Tax Credit?
When filing your tax return, you can claim tax credits that you are eligible for. A tax credit is a sum of money that can be deducted from the amount of taxes owed. Contrary to deductions and exemptions, which reduce the amount of taxable income, tax credits act as reduction catalysts to the actual amount of taxes to be paid. The amount of credit is dependent on its nature, as there are various types of personal tax credits.
How Do Tax Credits Work?
Common government objectives stimulating tax credits are to support disadvantaged taxpayers or encourage a particular behaviour, such as utilizing energy-efficient appliances.
Tax credits are preferable to tax deductions or exemptions, seeing that they lower tax payables dollar for dollar. In contrast, a deduction will reduce the tax liability within the limits of the marginal tax rate. For example, if the marginal tax rate for the individual is 25%, then for every tax dollar deducted, they would save $0.25.
Types of Tax Credits
Non-refundable tax credits
This only work towards reducing a payable, but seeing as it is non-refundable, it will only be applicable till a payable reaches $0. However, when you have an amount greater than the tax liability, resulting in a refund, non-refundable credits are no longer valid regardless of whether you are eligible for credits. This is because these credits are not paid out to the taxpayer, and in effect, are lost. Generally, most non-refundable tax credits are sufficient for the given tax year and cannot be carried forward or used in future years. As a result of this condition, low-income earners are negatively impacted as amounts of their non-refundable personal tax credits that are unused get lost rather than being used in upcoming tax years.
Refundable tax credits
This is most advantageous for taxpayers as the amount of the credit reduces your payable amount, and the excess amount is paid to you. Regardless of whether you have a tax liability or are entitled to a refund, the entire tax credit is utilized.
Partially refundable credits
Lastly, a select amount of tax credits are partially refundable, meaning that it can reduce tax payables and decrease taxable income. A recent example is the Child Tax Credit, which became refundable in 2018 for a max of $1,400 per eligible child. Each type of partially refundable credit has its criteria regarding the portion which can be treated as a refundable credit and non-refundable.
Personal Tax Credits 2020
It is increasingly important to notice some of the new personal tax credits available to us on our upcoming 2020 personal income tax returns so that you are well prepared for the following tax season. The following is a quick summary of some of the newly introduced personal tax credits that you may qualify for this year:
- Canada Training Credit Limit – In 2020, the Canadian federal government has introduced the Canada Training Benefit aimed to help with labour force disruptions as a result of technological changes. This is a refundable tax credit that provides financial coverage for tuition and training costs and breaks down the barrier to professional development. Being a part of the labour force, you would be able to receive a tax credit of up to $250 annually, up to a lifetime limit of $5,000, which can be used for eligible purposes. Based on the information within your return, the Canada Revenue Agency will calculate your Canada Training Credit Limit for the 2020 tax year and list it on your 2019 Notice of assessment, accessible from your CRA account.
The criteria to be eligible for this tax credit follows:
- A personal income tax return should be filed for the stated year;
- At the end of the tax year, fall between the age of 25 and 65 years old;
- During the year you must be a Canadian resident; and
- Have earnings anywhere between $10,000 up to a maximum $150,000, that are eligible during the year
- Canada Workers Benefit – Previously known as the Working Income Tax Benefit, the Canada Workers Benefit is a refundable tax credit available to low income earning individuals and families. In February 2020, the advance payments application will be adjusted to be more straightforward and accessible from your CRA account.
- Climate Action Incentive Payment – The Climate Action Incentive Payment is a refundable tax credit used to reduce tax liabilities and create or increase a refund. Residents of New Brunswick will no longer be eligible for the Climate Action Incentive Credit since the federal fuel charge is no longer applicable since April 2020. Eligible residents of Alberta can claim the Climate Action Incentive Credit. Furthermore, residents of Ontario, Manitoba and Saskatchewan remain eligible for this refundable tax credit.
- Canada Pension Plan (CPP) Enhancement – Beginning January 1, 2019, Canadians start to contribute more to the CPP. A deduction can be claimed to enhance contribution to the CPP. The annual contribution rates are scheduled to increase gradually over the next seven years. The adjustment to the CPP was made to help improve the retirement benefits and income for Canadians who work and for their families.
Maximum pensionable earnings will be rising in 2020 to $58,700, from $57,400 in the previous year. Additionally, employer and employee contributions rates are rising from 5.1% in 2019 to 5.25% in 2020.
- Claiming Cannabis as a Medical Expense – The Income Tax Act will be adjusted to be inclusive of the cannabis industry, as cannabis has recently become legal in Canada. Currently, for cannabis products bought after October 16, 2018, a medical expense personal income tax credit can be claimed. To be eligible to claim the deduction, the patient must:
- Be a recipient of a medical document as described in the Cannabis Regulations;
- Be enlisted as a client of the recipient of a sales licence; and
- Have the products bought from a holder of a sales license they are registered with.
How to Apply for Tax Credits and Benefits
To claim any tax credits or benefits, you would need to file a tax return for the given tax year.
We can help you prepare your Canadian tax return and ensure your refund is maximized. SRJ Chartered Professional Accountants is a Toronto and Mississauga based chartered professional accounting firm specializing in tax consulting for and advisory for individuals and businesses. If you have any questions or want to connect with an Accountant at SRJ Chartered Professional Accountants, please feel free to contact our offices at firstname.lastname@example.org or by phone at 647-725-2537.
Frequenty Asked Questions
What is the TD1 amount for 2020?
For 2020, the Ontario Basic Personal Amount is $10,783. This amount will be listed at the top of the TD1ON form of your tax return.
What is a personal tax credit return?
A personal tax credit return, also known as the TD1 is a form utilized to calculate the tax amount that can be deducted from an individual’s employment income and other income. The information contained in the form after being filled out informs your employer about your situation so they deduct the correct amounts from your paycheck.
How do I fill out a TD1 form 2020?
To begin, you would need the following information: your name, date of birth, address and social insurance number to complete the first portion. Following, you will need to fill out the boxes listed in the form with the appropriate amounts that can be claimed based on your circumstances.
What is the 2020 personal exemption?
The personal exemption, also known as the basic personal amount is a non-refundable tax credit that is claimable by all individuals. This is aimed to provide a complete reduction in federal income tax to be paid for individuals with a taxable income below this amount.
What is the personal tax exemption for 2020 in Canada?
The basic personal amount on a federal level for 2020 federal tax credits is $13,229. For 2020 provincial tax credits in Ontario, the amount is $10,738.