There are refundable and non-refundable tax credits. A tax credit that can't reduce the amount of tax owed to less than zero is a non-refundable tax credit. If the credit were able to reduce the amount of tax owed to less than zero, the taxpayer would be entitled to a payment from the government. A tax credit is applied to the amount of tax owed by the taxpayer after all deductions are made from his or her taxable income. For example, before credits, if the tax owed to the tax department is $500 and the taxpayer has a tax credit of $200, the total amount owed is $300. If the taxpayer has total non-refundable credits of $600, his or her tax bill will be $0 ($500 tax bill - $600 in non-refundable tax credits).
Refundable Tax Credit Example
A refundable tax credit is a credit that is paid to the taxpayer even if the taxpayer owes no tax. For example, the GST/HST tax credit is an example of a refundable tax credit. These credits are designed to assist taxpayers that have low income. An individual may earn $10,000 and owe no tax; however, would qualify for the HST/GST tax credit.
Non-Refundable Tax Credit Example
One of the non-refundable tax credits is the Public Transit tax credit that helps individuals cover the cost of public transit. As of January 1, 2007, the public transit tax credit has been expanded to include weekly passes. You must claim at least 4 consecutive weekly passes, and each weekly pass must provide unlimited public transit use for an uninterrupted period of between 5 and 7 days. To claim your Federal Transit Tax Credit, taxpayers should keep their receipts.
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