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What is a tax credit?

A tax credit reduces an individual’s tax payable. Rather than specifying the amount of each credit, in Canadian tax system, most credit is calculated by multiplying the base amount by the lowest tax rate. For example, the basic personal credit for 2011 is $1,579.05. It is calculated by taking 15% of $10,527.

Most tax credits are indexed to inflation

In order to avoid having the credits decline in value in terms of real dollars, most of the tax credits are fully indexed to the annual inflation rate, as determined by the applicable consumer price index (CPI) rates.

Tax credits may have to be prorated for part-year residents

Tax credits may have to be prorated for individuals who become Canadian residents or cease to be Canadian residents, since they are subject to Canadian taxation for only a part of the year.

Provincial tax credits

In addition, each of provinces and territories has its own independent tax structure, with rates that apply to these credits and help further reduce the overall tax payable.

Non-refundable and refundable tax credits

Most of the credits are non-refundable. They can only reduce the tax payable to zero. If the individual does not have sufficient tax payable to use the credit, it is of no benefit to the taxpayer.

There a few refundable tax credits that can result in a net payment from the government for the unused amount in case the taxpayer doesn't have sufficient tax payable to use the credit.

See a list of Non-refundable tax credits and refundable credits with explanation

Additional information