Tax Credit vs. Tax Deduction: What’s the Difference?
If you were like me, I used to think a tax credit and tax deduction meant the same thing; two terms used for the same meaning. When it comes to your tax return, they couldn’t be any more different. The difference between a tax deduction and a tax credit is one of the most common questions I hear from small business owners.
What Is a Tax Deduction?
A tax deduction, also called a taxable expense, reduces your taxable income. In other words: Tax deductions reduce the amount of income you are taxed on.
Example
If you earned $80,000 and had $20,000 in allowable business expenses, you’re only taxed on $60,000.
Common deductible expenses for small business owners
Office supplies and equipment
Advertising and marketing
Software subscriptions (QuickBooks, Canva, etc.)
Business insurance
Vehicle and mileage
Home office expenses
Cost of goods sold
What Is a Tax Credit?
A tax credit directly reduces your final tax bill, dollar for dollar. Generally speaking, a tax credit is more powerful than a tax deduction because they reduce your final tax bill, not your income.
How it works
If you owe $6,000 in tax and you have a $1,000 credit, your new balance drops to $5,000.
Two Types of Tax Credits
1. Non-refundable credits
These credits can reduce your tax payable to zero, but won’t create a refund.
Examples:
Basic Personal Amount
Medical expenses
Donations
Tuition credits
Interest paid on federal student loans
Volunteer firefighters’ & Search and Rescue amount
2. Refundable credits
These are credits you’re entitled to, so long as you’re eligible. If you owe income tax, this will reduce the amount you have to pay. If you are owed a refund, this will increase it.
Examples:
GST/HST credit
Canada Workers Benefit
Canada training credit
Tax Deduction vs. Tax Credit: The Key Difference
| Tax Deduction | Tax Credit | |
|---|---|---|
| Reduces | Taxable income | Final tax owed |
| Applied | Before tax is calculated | After tax is calculated |
| Value | Depends on your tax bracket | Same value for everyone |
| Example | $1,000 deduction saves ~$200 (20% bracket) | $1,000 credit saves $1,000 |
Why Keeping Your Bookkeeping Up to Date Matters
Understanding the difference between tax deductions and tax credits is important, but the real benefit comes from having organized, up-to-date bookkeeping throughout the year.
Here are the mistakes I see most often:
Mixing personal and business expenses
Missing receipts for deductible expenses
Forgetting to track mileage or home office use
Overlooking tax credits they're entitled to
Waiting until tax time to get organized
These issues can lead to missed deductions, inaccurate returns, and leave you open to CRA reassessments.
When your books are current, you can:
Clearly see which expenses you can deduct
Avoid missing out on tax credits you qualify for
Stay prepared for GST/HST filings
Make tax season predictable instead of stressful
Give your accountant complete, accurate information
Reduce the risk of CRA reassessments or denied expenses
When your financial records are clean and easy to follow, it becomes much simpler to claim everything you’re entitled to and to avoid surprises at year-end.
Want Help Making Tax Season Easier?
If keeping your books updated feels overwhelming, or you’re not sure whether you’re tracking things correctly, I can help.
I offer a free 30-minute consultation for small business owners in Canada. We can go over your bookkeeping system, answer questions, and make sure you’re set up for a smooth tax season.
Let’s take the stress out of your bookkeeping so you can focus on growing your business.