Tax Credit vs. Tax Deduction

One cuts your income, the other cuts your tax

A deduction is subtracted from your income before tax is calculated. Because Canadian tax brackets stack, a deduction erases dollars that would otherwise have been taxed at your marginal tax rate, which means the same deduction is worth more to a high earner than a low earner.

A $1,000 RRSP deduction saves about $535 for someone at Ontario's top combined rate of 53.53% (as of July 2026), but only about $200 for someone in the lowest bracket. Identical contribution, very different reward.

A credit skips the income step entirely. You calculate your tax first, then subtract the credit from the bill. Most federal credits are worth a fixed percentage of a base amount, almost always the lowest federal rate, which is 14% in 2026 (as of July 2026). So $1,000 of credit base, whether it is medical expenses or tuition, cuts about $140 off federal tax for almost everyone, whatever their income. The basic personal amount is the flagship example: everyone's biggest credit, worth roughly the same to a cashier and a CEO.

Common deductions

Deductions come off your income on the way to line 26000, your taxable income. The big ones for most Canadians:

• RRSP contributions, the largest deduction most people ever claim.
• [FHSA](/dictionary/fhsa) contributions, deductible like an RRSP while withdrawals for a first home stay tax-free.
• Childcare expenses, generally claimed by the lower-income spouse.
• Moving expenses, when you move at least 40 kilometres closer to a new job or school.
• Union and professional dues.
• Carrying charges, such as interest on money borrowed to invest in non-registered accounts and certain investment management fees.

Common credits

Credits appear on Schedule 1 territory of your return, after tax has been calculated. Frequent ones:

• Basic personal amount, automatic for everyone.
• Spouse or common-law partner amount, when your partner has little or no income.
• Age amount, for those 65 and up, income-tested.
• Medical expenses, for the portion above an income-based threshold.
• Charitable donations, the exception to the 14% rule: the first $200 earns credit at the lowest rate, and everything above $200 earns 29%, or 33% for top-bracket donors (as of July 2026).
• Tuition, with unused amounts transferable in part or carried forward.
• Disability amount, with a certified form T2201.

Non-refundable vs. refundable

Almost all the credits above are non-refundable: they can push your tax to zero, but never below it. If your income is low and your tax is already tiny, unused non-refundable credits usually evaporate (a few, like tuition, can be carried forward or transferred).

A refundable credit is real money regardless of your tax bill. The GST/HST credit arrives quarterly even if you owe no tax at all, the Canada Workers Benefit tops up low working incomes, and Québec's solidarity credit does similar work provincially. If a program pays out to people with zero tax payable, it is refundable; if it can only shrink a bill, it is not.

Which is better, and how to squeeze more from each

Dollar for dollar of base amount, a deduction beats an equal credit whenever your marginal rate is above the lowest rate, which is most working Canadians. That gap is the whole reason RRSP deductions are so powerful for high earners and comparatively modest for entry-level incomes.

The gap also creates strategy. You can contribute to an RRSP now but defer the deduction to a future year when your income, and marginal rate, will be higher: the contribution grows tax-sheltered either way, and the deduction pays more later. Couples can pool donations and medical expenses on one return: donations pool to get past the $200 low-rate tier faster, and medical expenses usually go on the lower-income spouse's return because the income-based threshold is smaller there.

One family of credits does not follow the 14% pattern at all: the dividend tax credit offsets the gross-up on Canadian dividends and works on its own arithmetic.