Non-refundable tax credits

To read more chapters, click below:

Chapter 1: Who is required to file an income tax return?

Chapter 2: Taxes for New Canadians: Step-by-Step Guide to Filing Your Tax Return

Chapter 3: Difference between refundable and non-refundable tax credits

Non-refundable tax credits are designed to reduce your federal tax obligation, but they do not result in a tax refund. In contrast, refundable tax credits not only lower your required tax payment but can also trigger a tax refund from the government.

In the previous chapter we had discussed about refundable and non-refundable tax credits. In this chapter we’ll focus on understanding the details about non-refundable tax credits and how you can benefit from them.

Difference between refundable and non-refundable tax credits

The primary distinction between non-refundable and refundable tax credits lies in what occurs when your cumulative non-refundable tax credits surpass the sum of your owed tax. In such cases, your outstanding amount will merely be reduced to zero; the excess credit amount will not be reimbursed.

With refundable tax credits, a noteworthy distinction exists. Even if you do not owe any taxes, the full value of your refundable tax credits will be refunded to you by the government in the form of a tax refund. In essence, this means that these credits can potentially result in you receiving money back from the government, even if you didn't owe any taxes to begin with.

Examples of non-refundable tax credits in Canada

1. Basic Personal Amount

The Basic Personal Amount is a significant non-refundable tax credit available to all Canadian taxpayers. It represents a certain portion of your income that you can earn without paying federal income tax on it. In other words, it reduces the amount of your income that is subject to taxation. The purpose of the Basic Personal Amount is to provide a basic level of income that remains untaxed, ensuring that individuals with lower incomes are not burdened by federal income tax on their essential earnings.

The exact value of the Basic Personal Amount can vary from year to year due to adjustments made by the government to account for inflation and economic conditions. It's important to note that the Basic Personal Amount is a non-refundable credit, meaning it can reduce the amount of tax you owe but won't result in a tax refund by itself if it exceeds your tax liability.

The Basic Personal Amount is deducted automatically from your total income when you calculate your federal taxable income on your tax return. This credit helps to ensure that lower-income individuals and families have a certain threshold of income that is tax-free, thus providing them with some financial relief.

2. Amount for an eligible dependent

If you provided financial support to a qualified dependent over the tax year, you have the opportunity to assert an eligible dependent amount, calculated by subtracting the dependent's income from the basic amount. In cases where the dependent experienced a physical or mental impairment, an additional supplement known as the Canada Caregiver Amount can be claimed. If you choose to file your return using the traditional paper method, you'll need to complete Schedule 5. However, if you opt for electronic filing, this schedule will be automatically included with your tax return.

The Canada Caregiver Amount is a non-refundable tax credit available to individuals who provide care and support for a dependent family member with a physical or mental impairment. This credit is intended to help offset some of the financial burden associated with caregiving responsibilities.

3. Tuition, textbook, and education amount

Contrary to its title, at the federal level, the sole available tax credit pertains to tuition. However, certain provinces or territories might still offer education or textbook credits. Here's the updated information on various provinces and territories regarding the Tuition and Education amounts for tax credits –

• Ontario and Saskatchewan have discontinued Tuition and Education amounts incurred after September 2017, but you can still carry forward previous amounts.
• Alberta will eliminate the Tuition and Education amount after 2020.
• Manitoba, Newfoundland and Labrador, and Nova Scotia will continue to retain the Tuition and Education amount.
• British Columbia removed the Tuition and Education amount after 2019.
• New Brunswick has reinstated the Tuition and Education amount that was removed in 2017. You can claim the 2017 and 2018 amounts on your 2019 income tax return.
• Prince Edward Island will continue to retain the Tuition and Education amount.
• Yukon eliminated the education tax credit in 2017 and subsequent years.
• The Northwest Territories will continue to retain the Tuition and Education amount.
• Nunavut will continue to retain the Tuition, Education, and Textbook amounts.
• In Quebec, tax credits for Tuition or Examination fees are still in effect.

These changes and variations in provincial and territorial tax credits should be considered when filing your income tax return, as they can impact the deductions and credits available to you based on your location and the tax year in question.

In addition to these, there exist various other non-refundable tax credits for which you could potentially qualify at both the federal and provincial or territorial levels. These include –

• Caregiver amount
• Disability amounts
• Volunteer firefighters’ amount
• Medical expenses
• Donation and gifts
• Search and rescue volunteer’s amount
• Home accessibility expenses
• Home Buyers’ Amount

If you are a resident of Canada for the entire year, you are eligible to claim the complete value of your non-refundable tax credits. For individuals who are not Canadian residents but are choosing to file under Section 217, the federal government places a limit on the number of non-refundable tax credits that can be utilized. However, if you are a Canadian resident or citizen, this restriction does not apply to you, and you have the flexibility to claim all your non-refundable tax credits.

What is refundable tax credit?

a refundable tax credit is a type of tax credit that can result in a tax refund from the government, even if the taxpayer has no federal income tax liability or if the tax credit amount exceeds the taxes owed. Refundable tax credits are designed to provide financial assistance or benefits to specific individuals or households, particularly those with lower incomes.

Some of the most common examples of refundable tax credits in Canada are –

• CPP Overpayment and EI Overpayment
• GST/ HST rebate
• Climate Action Incentive
• Refundable Medical Expenses
• Eligible educator school supply credit
• Canada Workers Benefit

Here are key characteristics of refundable tax credits in Canada –

Benefit for Low-Income Individuals: Refundable tax credits are often targeted at low- and moderate-income individuals and families to provide financial support.

• Tax Liability Offset: While non-refundable tax credits can reduce your federal tax liability to zero but cannot result in a refund beyond that, refundable tax credits can lead to a refund even if you didn't owe any federal income tax.
• Examples of Refundable Tax Credits: Some examples of refundable tax credits in Canada include the Canada Child Benefit (CCB), the GST/HST Credit, and the Working Income Tax Benefit (WITB). These credits provide direct financial assistance to eligible individuals or families, and any excess credit amount beyond their tax liability is refunded.
• Regular Tax Credits vs. Refundable Tax Credits: Regular (non-refundable) tax credits can only reduce your federal tax liability to zero. If you have non-refundable tax credits that exceed your tax liability, the excess cannot be refunded, but it can be carried forward to offset future tax liabilities.
• Combining Credits: In some cases, individuals may be eligible for both non-refundable and refundable tax credits. The non-refundable credits are applied first to reduce the tax liability, and any remaining refundable credits can result in a tax refund.