Tax Deduction
A tax deduction reduces your taxable income before tax is calculated, effectively saving you money at your marginal tax rate. The higher your marginal rate, the more valuable a deduction becomes. This is why RRSP contributions are particularly valuable for high-income earners.
Common deductions include: RRSP contributions, union and professional dues, child care expenses, moving expenses (if you moved for work or school), carrying charges on investments, and the self-employed portion of CPP contributions. Business expenses for self-employed individuals are also deductible against business income.
The distinction between deductions and credits matters for tax planning. A $1,000 RRSP deduction at a 40% marginal rate saves $400 in tax. A $1,000 non-refundable tax credit (applied at the 15% base rate) saves $150. This is why financial planners recommend contributing to an RRSP when your marginal rate is high and withdrawing when it's lower (typically in retirement).
Related Terms
RRSP (Registered Retirement Savings Plan)
An RRSP is a government-registered account where contributions are tax-deductible and investments grow tax-free until withdrawal.
Marginal Tax Rate
The marginal tax rate is the rate of tax applied to your last (or next) dollar of income.
Tax Credit
A tax credit directly reduces your tax payable, dollar for dollar.