Image Alt Text

What Is a Refundable Tax Credit?

Sorting out different types of tax credits can take some work. But it’s also important to know about potential tax credits because they can save you a significant amount of money on your tax returns by reducing your tax obligations. Refundable tax credits are particularly advantageous because you get them even if you don’t have a tax liability.

Basics of Refundable Tax Credits

Tax credits lower what you owe to the Canada Revenue Agency (CRA). They’re dollar-for-dollar reductions in the amount of income tax you owe. So if you owe $3,500 in taxes but you’re eligible for $2,500 in tax credits, you only owe $1,000. Tax credits can either be refundable or non-refundable. A refundable tax credit reduces your tax liability even if you don’t owe any taxes or they refund takes your liability to less than zero. In other words, you get a refund based on the tax credit if it’s more than what you owe. Say you owe $1,000 and you qualify for $1,500 in refundable tax credits. You get a refund of $500.

A non-refundable tax credit doesn’t reduce your tax liability below zero. If you owe $1,200 and qualify for $1,500 in nonrefundable tax credits, your tax liability goes down to $0, but you don’t get the extra $300 as a refund.

Refundable tax credits benefit you more because you can take full advantage of the amount and possibly get a refund. Being aware of the available refundable credits helps you reduce your tax obligation as low as possible.

Working Income Tax Benefit

The Working Income Tax Benefit is a refundable tax credit that reduces the tax liability of qualifying low-income individuals and families who work for salaries or wages. Eligibility requirements for the tax year include:

  • Income of over $3,000
  • At least 19 years of age as of December 31
  • Canadian resident during the entire tax year

However, some issues affect eligibility. You don’t qualify if:

  • You don’t have an eligible dependent and are a full-time student at certain schools for more than 13 weeks during the year.
  • You’re incarcerated for at least 90 days during the year in a penal or similar institution.
  • You’re not required to pay taxes in Canada, for example, because you’re an officer of another nation.

Some individuals and families qualify to receive up to 50% of this tax credit in advance payments. Applicants for advance payments must file for them prior to the September 30 deadline and receive the advance in quarterly installments, if approved.

Eligible Educator School Supply Tax Credit

The Eligible Educator School Supply Tax Credit is a refundable tax credit allowing eligible educators to claim a credit to cover the qualifying teaching supply expenses. You can claim up to $1,000 in qualifying expenses, and you get a 15% refundable tax credit on that amount. Say you have $500 in qualifying expenses. Your refundable tax credit is $75. If you have $1,000 in qualifying expenses, you get a $150 refundable tax credit. Since the max in expenses is $1,000, you can’t claim anything beyond that amount even if the expenses qualify. To claim the expenses, they can’t be eligible for reimbursement under any other form of assistance, and you can’t deduct the purchase when calculating income reported on your tax return. You have to take the tax credit for the tax year in which you purchase the items.

Qualifying purchases include consumable items used to facilitate teaching. It doesn’t include most durable items, such as furnishings or computers. However, some non-consumable items qualify, including puzzles, classroom books, and educational software. For the purposes of this credit, you qualify as an eligible educator if you work at an elementary or secondary school or a regulated child care facility and have a valid teacher’s certificate or a valid certificate or diploma in early childhood education.

Donation Carry-Forwards

Sometimes you may have deductions that should result in a refund, but they’re not refundable tax credits. If you take the deductions during a given tax year, you lose the benefit of the deduction to the extent it would otherwise push your tax liability below zero. To avoid losing such a deduction, consider carrying it forward to future tax years. Some deductions eligible for carry-forwards include certain donations and medical expenses. Others, such as eligible tuition, education, and textbook expenses, can be carried forward or transferred to someone else.

Understanding the eligibility requirements for getting refundable tax credits can make a big impact in your tax return. You can take the stress out of tax time by tracking your expenses and organizing your receipts throughout the year. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.

Related Articles

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Firm of the Future

Expert advice and resources for today’s accounting professionals.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.