8 What are tax credits?
Wahaj Awan
After you calculate taxes payable by applying marginal rates to the taxable income, tax credits are applied to reduce the taxes payable.
Types of tax credits:
There are two types of tax credits, non-refundable and refundable. Non-refundable credits can only be used to reduce taxes payable to zero. Most of these credits, if unused during the current year are lost; however, some of these credits like the tuition credit may be carried forward to following years. Refundable tax credits are paid to individuals even if their tax payable is zero. (note: almost all the tax credits you deal with in this course are non-refundable tax credits.)
Why do tax credits exist?
Tax credits were created by the government to provide tax benefits to specific groups of people. Typically these credits are aimed to help out people with disadvantages: low income, disabilities, senior citizens etc.
Difference between a tax credit and a tax credit base:
A tax credit base is an amount that is multiplied by the “appropriate percentage” (currently 15%) which then gives us the tax credit. Tax credit is the amount that will reduce the tax payable. You can find tax credits bases for individuals in the FITAC > Tax Rates and Tools under “Income tax rates and credits – Individuals”. For those of you who have been employed in Canada you may have noticed amounts ‘taken off’ your pay cheque for Employment Insurance and the Canada Pension Plan. This amount is the tax credit base and is multiplied by 15% (you’ll see this referred to as ‘an appropriate percentage’ in the ITA) to get your tax credit.
Common credits for individuals with employment income as of 2023: (assume the maximum Employment Insurance (“EI”) and CPP amounts are available)
| Credits | Tax credit base | Appropriate percentage | Tax credit | ITA citation |
| Basic personal credit | $15,000 | 15% | $2,250 | ITA 118(1.1) |
| Canada Employment credit | $1,368 | 15% | $205 | ITA 118(10) |
| EI credit | $1,002 | 15% | $150 | ITA 118.7 |
| CPP credit (*) | $3,123 | 15% | $468 | ITA 118.7 |
* The CPP calculation is a bit more nuanced, see chapter on the CPP credit for further details
Basic Personal Amount Credit – The Basic Personal Amount (“BPA”) is reduced for individuals with Net Income for Tax Purposes (NITP) beyond a certain threshold as follows:
- For individuals with NITP of $165,430 or less, the BPA is $15,000
- For individuals with NITP of $235,675 or more, the BPA is $13,521
- For individuals with NITP between $165,430 and $235,675 the Basic Personal Amount is calculated using the formula: $15,000 – ($1,479 x (NITP – $165,430) / $70,245)).
References and Resources:
- ITA – 118(1.1), 118(10), 118.7
- Article – “8.3.5 Tax credits” (Author: Government of Canada)
- Article – “8.3.6 Non-refundable and refundable tax credits” (Author: Government of Canada)
2020
