What is a Non-Refundable Tax Credit in Canada?

There are so many terms in the world of taxes that it can all get a bit overwhelming at times.  That’s why most Canadian usually won’t be found doing their own taxes.  They get either an online tax service or a tax professional to help them with it.

However, there are a few terms it helps to understand so that you can prepare yourself ahead of time.  In the case of this article, we’ll explain non-refundable tax credits (as well as refundable ones) because these can help quite a bit in limiting your tax liability at the end of the year.

What is a Non-Refundable Tax Credit?

A non-refundable tax credit is an income tax break that reduces your taxable income on what’s called a dollar-for-dollar basis. 

Let’s get a bit deeper than this and provide some examples so you can fully understand how it works and where these tax breaks might come from.

How Does a Non-Refundable Tax Credit Work?

When you receive a non-refundable tax credit, it does reduce your taxable income, but it can only reduce your taxable income to zero – it cannot result in a refund.  If you receive several big non-refundable tax credits and it drops your taxable income into negative territory, it will not result in additional money for you in a tax refund.

Let’s add some numbers to help and say you owe $5,000 income tax.  If you receive a $1,000 non-refundable tax credit, then you will only owe $4,000 in taxes.  If you end up receiving $6,000 in non-refundable tax credits and still only owe $5,000 income tax, then you will only bring your taxes down to zero and the additional $1,000 credit is forfeited.

The non-refundable tax credits available tend to be a double-edged sword, especially for lower income taxpayers.  If you already owe very little income tax and receive several non-refundable tax credits, then you don’t get to receive the full benefit as most of the tax credit would be forfeit.

What Is a Refundable Tax Credit?

Refundable tax credits are very similar to non-refundable tax credits with one very important difference.  They will also reduce your taxable income on a dollar-for-dollar basis, but if your refundable tax credit causes your taxable income to fall into negative territory, then the government will refund you the difference.

Examples of Non-Refundable Tax Credits

There are several types of each tax credit.  Some are accessible to anyone, and some are only meant for a small number of people with very particular circumstances.  The following list and amounts are for the 2020 tax year.  The credit amounts could change every year, and this list only includes some of the most used.

–          A basic non-refundable tax credit is one that is available to all taxpayers who file tax returns.  The CRA changes this number every year based on inflation and a few other factors, but for 2020 the basic tax credit was $13,229 per person (Quebec tax credit was $15,532).

–          A senior non-refundable tax credit is for people over the age of 65 and allows those citizens to claim a $7,637 non-refundable tax credit (Quebec tax credit is $3,267).

–          A child non-refundable tax credit applies to each child you have in your family under the age of 18.  For 2020, each qualifying child allowed one to claim $2,273.

–          A pension non-refundable tax credit was for those who received income from a pension and allowed one to claim $2,000 (Quebec tax credit was $2,902).

–          A medical expenses non-refundable tax credit is for any medical expenses for which you were not reimbursed.  If your medical plan covers 80% of expenses and you had to pay the remaining 20%, that 20% is allowed as a non-refundable tax credit.

–          A charitable donations non-refundable tax credit allows you to claim up to 33% of the total donations you contributed for the year as a non-refundable tax credit.

Examples of Refundable Tax Credits

Remember that refundable tax credits allow you to receive a refund if it brings your taxable income below zero.  Here are some of the commonly used tax credits.

–          The CPP overpayment tax credit is for those who may have overcontributed to the Canada Pension Plan (CPP) from paycheck deductions during the year.

–          If you overpaid your EI premiums this will also result in a tax credit and potential refund if your taxable income drops below zero.

–          Refundable medical expenses are special case medical expenses for those with disabilities who have to pay for certain items or services.  These expenses, if accepted, result in a refundable tax credit.

Summary

While taxes are complicated across the board, make sure that you go through the lists of both non-refundable and refundable tax credits to make sure you receive the credits for which you meet requirements. 

Regardless of your situation, you will at least qualify for the basic personal amount, though be sure to check each year for what this amount is at it will change.

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