For Personal Income Tax In Canada, There Is A Fixed Sequence: Non-Refundable Credits First, Followed By Refundable Credits

INTRODUCTION: You don’t get to choose how your Non-refundable tax credits are used—the system already has an order.

When calculating personal income tax in Canada, many taxpayers assume that non-refundable tax credits can be applied in whatever order is most beneficial. However, the reality is more structured—and may affect your tax outcome. Taxpayers often want to know whether certain credits, such as tuition, are applied before others, and whether that sequencing could affect how much tax they ultimately pay or which credits may go unused.

In fact, there is a specific, legislated order in which non-refundable tax credits must be applied to reduce an individual’s federal tax payable. This order is set out in section 118.92 of the Income Tax Act and is strictly followed by the Canada Revenue Agency (CRA) when calculating tax liability. Understanding how this ordering works is essential, particularly for individuals with multiple credits, as it directly impacts the ability to fully utilize certain credits or carry them forward to future years.

What are Tax credits?

Tax credits are provisions in the Canadian tax system that reduce the amount of tax an individual must pay. They are designed to recognize certain personal circumstances, expenses, or contributions, and to provide tax relief for eligible taxpayers. Tax credits are distinct from deductions: while deductions reduce your taxable income, tax credits directly reduce the amount of tax you owe.

What are the Types of Tax Credits?

There are two main types of tax credits in Canada:

1. Refundable tax credits
2. Non-refundable tax credits

Refundable Tax Credits

Refundable tax credits are credits that can be paid to a taxpayer even if they have no income tax payable for the year. In other words, if the amount of a refundable tax credit exceeds the total tax you owe, the excess is paid to you as a refund.

Common examples of refundable tax credits in Canada include: The GST/HST credit, the Canada Workers Benefit, and the refundable medical expense supplement.

Non-Refundable Tax Credits

Non-refundable tax credits are credits that can only reduce your federal tax payable to zero; they cannot create or increase a tax refund. In other words, if the total of your non-refundable tax credits is greater than your tax owing, the excess amount is not paid out to you as a refund, nor can it be used to offset taxes in another year (with some exceptions for credits that can be carried forward or transferred, such as tuition tax credits).

The Income Tax Act sets the exact order your Non-refundable tax credits must follow

Section 118.92 of the Income Tax Act prescribes the order in which various non-refundable tax credits are to be applied in computing an individual’s tax payable. The provision states that, in computing an individual’s tax payable under Part I of the Act, the following credits must be applied in the order listed:

1. Subsections 118(1) and (2): These include the basic personal amount, the spouse or common-law partner amount, the amount for an eligible dependent, and the age amount.
2. Section 118.7: Credits for employee premiums for Employment Insurance (EI) and employee contributions to the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).
3. Subsections 118(3) and (10): Pension income amount and certain other credits.
4. Sections 118.01, 118.02, 118.04, 118.041, 118.05, 118.06, 118.07, 118.3, 118.61, 118.5, 118.9, 118.8, 118.2, 118.1, 118.62, and 121: These cover a range of credits, including the disability amount, tuition amount, education amount (for years prior to 2017), medical expenses, charitable donations, and the dividend tax credit, among others.

Here’s how your Non-refundable tax credits are actually applied—step by step.

This explains the order in which non-refundable tax credits are applied:

• Basic Personal Amount: This is always applied first, as it falls under subsection 118(1).
• CPP Contributions and EI Premiums: These are applied next, under section 118.7.
• Canada Employment Amount: This is included in subsection 118(10) and is applied after the above.
• Tuition Credit: The tuition amount (section 118.5) is applied after the above credits, but before the charitable donation credit.
• Charitable Donation Credit: This is applied later, under section 118.1.

If your tax hits zero early, some credits won’t be used—even if you have them.

The order is important because non-refundable tax credits can only reduce your federal tax payable to zero; they cannot create a refund. If you have more credits than tax payable, any unused portion of certain credits (like the tuition amount) may be carried forward to future years or transferred to a spouse, parent, or grandparent, but only after the mandatory order is followed.

For example, if your basic personal amount, CPP, EI, and Canada employment amount credits are sufficient to reduce your tax payable to zero, your tuition credit will not be used in the current year and can be carried forward. However, you cannot choose to use the tuition credit first and carry forward the basic personal amount or other credits; the order is fixed by law.

Unused charitable donation credits can also be carried forward for up to 5 years (or 10 years for ecological gifts). If your donations exceed the annual limit (generally 75% of net income) or you don’t need to use the full credit, the unused portion can be claimed in future years. However, you must claim older donations first. Carrying forward can help maximize higher credit rates on amounts over $200.

The CRA enforces a fixed order for tax credits

The CRA’s administrative guidance, as well as most tax preparation software, follows the legislated ordering of credits. Taxpayers cannot alter this sequence to optimize the use of credits for their personal situation. This is confirmed in CRA publications and technical interpretations, which emphasize that the ordering rules are mandatory and not subject to taxpayer discretion. See CRA Order of Provisions Applicable in Computing an Individual’s Taxable Income and Tax Payable. IT-523, August 25, 1989 [Archived].

Pro Tax Tips: You can’t change the order—but you can understand how it affects your tax outcome.

Understanding the order in which non-refundable tax credits are applied is essential for Canadian taxpayers. This knowledge allows a taxpayer to anticipate which credits will be used in a given year and, where applicable, which credits may be carried forward for future use and can be used for effective tax planning.

As discussed earlier, Canadian tax law sets out a specific and mandatory sequence for applying non-refundable tax credits to reduce federal tax payable. Credits such as the basic personal amount, Canada Pension Plan (CPP) contributions, Employment Insurance (EI) contributions, and the Canada employment amount are applied first. These are followed by the tuition tax credit and then by the charitable donation tax credit.

This above order is not flexible. A taxpayer cannot choose how credits are applied, and the Canada Revenue Agency (CRA) will always follow the sequence established under section 118.92 of the Income Tax Act.

Our experienced Canadian tax lawyers can help you understand how these rules apply to your situation and assist in planning the effective use of available tax credits.

Frequently Asked Questions (FAQs):

What are examples of Non-Refundable Tax Credits

Common federal non-refundable tax credits include:

• Basic personal amount
• Spousal or common-law partner amount
• Age amount
• Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions
• Employment insurance (EI) premiums
• Canada employment amount
• Disability amount
• Tuition amount
• Medical expenses
• Charitable donations

These credits are listed on the federal tax return and are available only if you meet specific eligibility criteria.

What are the Key Features of Non-Refundable Tax Credits

• They reduce your tax payable, but not below zero.
• Any unused portion (with some exceptions, such as tuition credits) is generally lost and cannot be refunded or carried forward.
• Some credits, like the tuition amount, can be transferred to a spouse, parent, or grandparent, or carried forward to future years if not fully used.
• The credits are calculated at the lowest federal tax rate (15% for 2025).

What are Refundable Tax Credits?

Refundable tax credits (unlike Non-Refundable Tax Credits) are credits that can result in a payment to you even if you have no tax payable. Examples of these kinds of credits include:

• Canada Workers Benefit (CWB): A refundable tax credit for low-income individuals and families who are in the workforce. If you qualify, you can receive the benefit even if you do not owe any tax.
• CWB Disability Supplement: An additional refundable amount for people with disabilities who qualify for the CWB.
• GST/HST Credit (now called the Canada Groceries and Essentials Benefit): A quarterly payment to help individuals and families with low and modest incomes offset all or part of the GST or HST they pay.
• Canada Child Benefit (CCB): A tax-free monthly payment made to eligible families to help with the cost of raising children under 18 years of age.
• Child Disability Benefit (CDB): A tax-free monthly benefit for families who care for a child under age 18 with a severe and prolonged impairment.
• Canada Training Credit (CTC): A refundable tax credit for eligible tuition and training fees, up to your available Canada Training Credit Limit.
• Refundable Medical Expense Supplement: A refundable credit for low-income individuals with high medical expenses.
• Eligible Educator School Supply Tax Credit: A refundable credit for teachers and early childhood educators who purchase eligible teaching supplies.
• Provincial and Territorial Refundable Credits: Many provinces and territories offer their own refundable credits, such as climate action incentives, property tax credits, and energy rebates.

If you qualify for refundable credits, you receive the credit amount even if your tax payable is zero.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.