Tax Credits vs. Tax Deductions: Which Saves You More Money?
When it comes to reducing your tax bill, understanding the difference between tax credits and tax deductions is crucial. While both reduce the amount you pay to the CRA, they work in fundamentally different ways and provide different levels of benefit depending on your income and tax situation.
At BBS Accounting in Toronto, we’re frequently asked about the difference between credits and deductions. Many Ontario taxpayers don’t realize which tax benefits they’re claiming are credits versus deductions, and more importantly, how to strategically maximize both.
Understanding Tax Deductions
Tax deductions reduce your taxable income. They’re subtracted from your gross income before your tax liability is calculated.
Think of deductions as reducing the income that gets taxed in the first place. If you earn $80,000 and claim $10,000 in deductions, you’re only taxed on $70,000 of income.
The value of a deduction depends on your marginal tax rate. The higher your income and tax bracket, the more valuable each deduction becomes.
Example: If you’re in the 30% combined federal and Ontario tax bracket and claim a $1,000 deduction, you save $300 in taxes. If you’re in the 50% bracket, that same $1,000 deduction saves $500.
This is why deductions are particularly valuable for high-income earners. The same dollar amount of deduction provides greater tax savings as income increases.
Common deductions for Ontario taxpayers include RRSP contributions, childcare expenses, moving expenses, employment expenses (with T2200), business expenses for self-employed individuals, carrying charges and interest expenses on investments, and union or professional dues.
Understanding Tax Credits
Tax credits directly reduce the amount of tax you owe. They’re applied after your tax liability is calculated.
Think of credits as a dollar-for-dollar reduction in the tax you owe. If you owe $5,000 in tax and have $1,000 in credits, you now owe $4,000.
However, most personal tax credits in Canada are non-refundable and calculated at the lowest tax rate (15% federally). This means a $1,000 credit base amount typically translates to $150 in actual federal tax savings, plus Ontario’s equivalent.
Example: The basic personal amount for 2025 is $15,705 federally. This generates a tax credit of $2,356 federally (15% of $15,705), plus additional Ontario credit. You don’t directly receive this amount; rather, your tax owing is reduced by this credit.
There are two types of tax credits: non-refundable credits that can only reduce your tax to zero but not below (you can’t get money back), and refundable credits that can result in a refund even if you don’t owe any tax.
Common non-refundable credits include the basic personal amount, spouse or common-law partner amount, Canada employment amount, age amount (65+), pension income amount, disability tax credit, medical expense credit, charitable donation credit, and tuition and education credits.
Common refundable credits include the GST/HST credit, Canada Workers Benefit, Ontario Trillium Benefit (property tax, energy costs, and sales tax credits), and certain provincial credits for families and low-income individuals.
Which Is Better: Credits or Deductions?
The answer depends on your income level and the specific credit or deduction in question.
For high-income earners, deductions are typically more valuable because they reduce income taxed at your highest marginal rate. An RRSP contribution that saves 50% of the contributed amount for someone in the top bracket is more valuable than most credits.
For low to moderate-income earners, refundable credits are often more valuable because they can result in money back even if you don’t owe tax. The GST/HST credit, Canada Workers Benefit, and Ontario Trillium Benefit provide real cash to eligible recipients.
For everyone, understanding both and claiming everything you’re entitled to maximizes your tax benefit.
Deep Dive: RRSP Contributions (Deduction)
RRSP contributions are deductions, not credits. This makes them particularly powerful for middle and high-income Ontario taxpayers.
If you earn $90,000 in Ontario, your marginal tax rate is approximately 29.65% federal plus 11.16% Ontario, totaling about 40.81%. A $10,000 RRSP contribution saves approximately $4,081 in taxes.
The same $10,000 contribution for someone earning $50,000 (in the roughly 29.65% combined federal-Ontario bracket) saves approximately $2,965 in taxes.
This is why high-income earners benefit more from RRSP contributions in absolute dollar terms, even though the contribution limits are based on income percentages.
At BBS Accounting, we help clients determine optimal RRSP contribution strategies based on their income, tax brackets, and financial goals.
Deep Dive: Charitable Donations (Credit)
Charitable donations generate tax credits calculated at 15% federally on the first $200 donated, then 29% on amounts above $200 (or 33% on amounts above $200 for taxpayers in the top federal bracket).
Ontario adds provincial credits of 5.05% on the first $200 and approximately 11.16% on amounts above $200.
Example: If you donate $1,000 to registered Canadian charities, you receive approximately $200 in federal credit ($30 on first $200, plus $232 on remaining $800) and additional Ontario credits, totaling roughly $300-350 in total tax savings depending on your income.
Unlike deductions, donation credits don’t increase in value with income for amounts up to approximately $220,000. However, the highest earners receive an enhanced federal credit rate of 33% on donations above $200.
Charitable donations can be carried forward for up to five years, allowing you to bundle donations in high-income years to maximize the benefit.
Deep Dive: Medical Expenses (Credit)
Medical expenses generate a non-refundable tax credit calculated on expenses exceeding the lesser of 3% of your net income or $2,635 (for 2025).
The credit rate is 15% federally plus Ontario’s rate, meaning if you have $10,000 in eligible medical expenses and your threshold is $2,500, you can claim $7,500. This generates approximately $1,125 to $1,275 in combined federal-Ontario tax credits.
Medical expense credits are particularly valuable for Ontarians with significant dental work, vision care, mobility aids, home modifications for accessibility, or ongoing prescription costs.
You can claim medical expenses for yourself, your spouse, and dependent children. You can also claim expenses for dependent relatives if you support them.
Deep Dive: Childcare Expenses (Deduction)
Childcare expenses are deductions, typically claimed by the lower-income spouse. For 2025, you can deduct up to $8,000 per child under 7, $5,000 per child aged 7-16, and $11,000 per child eligible for the disability tax credit.
Because this is a deduction, the tax savings depend on your marginal rate. If your marginal rate is 30% and you claim $8,000 in childcare expenses, you save $2,400 in taxes.
Eligible expenses include daycare, preschool, day camps (not overnight camps), nannies, and babysitters. Keep detailed records including the caregiver’s name, address, SIN or business number, and amounts paid.
Deep Dive: Canada Workers Benefit (Refundable Credit)
The Canada Workers Benefit (CWB) is a refundable credit for low-income individuals and families who are working. For 2025, single individuals can receive up to approximately $1,428, and families can receive up to approximately $2,461.
This credit has income thresholds. It begins phasing out at around $23,495 for singles and $26,805 for families, and is completely phased out at higher income levels.
Because it’s refundable, you receive this money even if you don’t owe any taxes. For eligible Ontario workers, this is valuable financial support.
Deep Dive: Ontario Trillium Benefit (Refundable Credit)
The Ontario Trillium Benefit (OTB) combines three credits: Ontario Energy and Property Tax Credit (OEPTC), Northern Ontario Energy Credit (NOEC), and Ontario Sales Tax Credit (OSTC).
These are refundable credits paid monthly. The amounts depend on your income, accommodation costs, property taxes or rent paid, and whether you live in Northern Ontario.
For a Toronto renter paying $1,500 monthly rent with modest income, the OTB can provide several hundred dollars annually in quarterly payments.
Strategies to Maximize Both Credits and Deductions
Smart tax planning involves leveraging both credits and deductions strategically.
Timing RRSP contributions: If you expect higher income in the future, consider carrying forward RRSP contribution room to use when your marginal rate is higher. The deduction will be worth more.
Bunching charitable donations: Instead of donating $1,000 annually, consider donating $5,000 every five years. This maximizes the amount receiving the higher credit rate above $200.
Strategic medical expense timing: You can claim any 12-month period ending in the tax year. If you have flexibility in scheduling medical procedures or expenses, timing them to maximize the amount in one claim period increases your benefit.
Splitting pension income: Couples with pension income can split up to 50% between spouses. This can reduce the higher-income spouse’s marginal rate, making deductions on their return less valuable but potentially creating more overall family tax savings.
Income splitting with family: Paying reasonable salaries to family members who genuinely work in your business shifts income to lower tax brackets, making deductions on your return less valuable but reducing total family tax.
Business Owner Considerations
For Ontario business owners, understanding credits versus deductions is particularly important for tax planning.
Business expenses are deductions against business income. If your business earns $100,000 and you have $40,000 in expenses, you’re taxed on $60,000.
For sole proprietors and partners, this flows to your personal return as income, then subjected to your marginal rate.
For corporations, business expenses reduce corporate taxable income, potentially keeping you in the small business deduction zone (12.2% tax rate instead of 26.5% on the first $500,000 of active business income).
Investment tax credits for research and development (SR&ED credits, Ontario Innovation Tax Credit) are credits that reduce corporate taxes owing, but at much higher rates than typical personal credits.
Common Mistakes to Avoid
Many Ontario taxpayers make these mistakes when dealing with credits and deductions:
Not claiming all eligible expenses. Many people don’t realize they can claim medical expenses, moving expenses, or work-from-home expenses. Review all available credits and deductions annually.
Claiming on the wrong spouse’s return. Certain credits like medical expenses and charitable donations can be claimed by either spouse. Run the calculation both ways to see which provides the best family benefit.
Not carrying forward unused amounts. Tuition credits, charitable donations, and business losses can be carried forward. Don’t lose these by forgetting to track them.
Missing refundable credits. Many low to moderate-income Ontarians don’t realize they qualify for refundable credits like the Canada Workers Benefit or Ontario Trillium Benefit. These are real money, not just tax reductions.
Not optimizing RRSP contributions. Contributing to an RRSP without considering your marginal rate, or contributing when you’re in a low-income year, can waste the deduction’s value.
Working with BBS Accounting
At BBS Accounting in Toronto, we analyze every client’s situation to maximize both tax credits and deductions. Our detailed approach includes:
- Identifying all eligible credits and deductions specific to your circumstances
- Calculating optimal allocation between spouses for transferable amounts
- Modeling different scenarios (timing RRSP contributions, bunching donations, etc.)
- Ensuring you’re claiming valuable refundable credits you may not know about
- Planning for future years to position you for maximum tax benefits
Our fee is typically recovered many times over through the additional credits, deductions, and strategic planning we provide.
The Bottom Line
Tax credits and deductions both reduce your tax bill, but in different ways. Deductions reduce your taxable income and are more valuable at higher income levels. Credits reduce tax owing and provide more consistent benefits across income levels, with refundable credits being particularly valuable for lower-income taxpayers.
The best tax strategy leverages both. Claim every deduction you’re entitled to, especially if you’re in higher tax brackets. Claim every credit available, particularly refundable ones that can put money in your pocket even if you don’t owe tax.
Don’t leave money on the table by not understanding or claiming these valuable tax benefits. Contact BBS Accounting today for a comprehensive review of your tax situation. We’ll identify every credit and deduction available to you and implement strategies to minimize your taxes both this year and in the future.
Your tax situation is unique. Let our Toronto team develop a personalized strategy that keeps more money in your pocket through smart use of both tax credits and deductions.