The tax-free savings account (TFSA) was introduced by the Conservative government in time for the 2009 calendar year. A recent poll showed that fewer than 25 per cent of Canadians have opened one.

So what are they? A TFSA has some similarities to a Registered Retirement Savings Plan (RRSP). Both are tax shelters and the same types of accounts and investments can be used in both. The major difference lies in tax treatment, and how much you can put in.

RRSPs were designed for retirement and will defer income. Any amount you put in reduces your income for tax purposes, but becomes income when you pull it out. A TFSA has no such advantage. However, any income made by investments in the TSFA plan – whether interest, dividends or capital gains are not taxed while within the account. Although TFSAs are being marketed as tax-free savings tools, at current rates there's not much point in just leaving the money to accrue tax-free interest. Their main advantage lies in being able to make money by investing the money in them, without paying taxes until you withdraw.

We all want as many tax deductions as we can get, because tax deductions are a legitimate way to reduce your taxable income and when our taxable income is reduced we pay less income tax.

The bad news is that, compared to tax credits , there are relatively few deductions available to Canadian taxpayers. But here's six many of us can take advantage of.

1. RRSP Contributions

The most common deduction is money invested inside a Registered Retirement Savings Plan (RRSP). Money (and income made on it) inside an RRSP is sheltered from being taxed in the current year. It will, however, be taxed in later years – presumably when you are retired and not making as much income as your income earning years. But the plan is that your tax rate is usually lower, so you should get to keep more of your money by the time you withdraw it.

Tax credits may be one of the least understood parts of filing taxes. Well, that and deductions .
The thing is, depending on your income level the distinction between them is a bit fuzzy to most people.

Like deductions, tax credits reduce your tax payable, just not directly. They are added together and will reduce your tax payable at the lowest tax rate. That rate is currently 15 percent for federal income tax; for 2010 that included income up to $40,970.

Many tax deductions and credits are for one-time or unusual events. Some are relatively new and have not had time to fully seep into our collective consciousness. How often do you really think about your taxes, or tell yourself: maybe that's now more affordable, if I factor in the tax reduction?

Education: Tuition, Courses and Materials
In addition to tuition, you get an amount for each month you are in an accredited, post-secondary educational institution. These amounts cover course materials and books; you get a set amount for each month of full-time or part-time study. A limited amount can be transferred to your spouse, or the parents or grandparents of yourself or your spouse; transferred amount must be in the year they are earned and cannot exceed $5,000. In low income years, the unused amount can be transferred to future, higher income years.

What do most people want to know about income tax? The most common question is what income is taxable.

Sadly, the answer is usually everything. If in doubt, it's almost certain to be taxable. In fact, it's much easier to consider what is not taxable, as that is a fairly short list.

Things Not Subject to Income Tax

• Transfer payments from the government. This includes Canada Child Tax Benefit (CCTB) payments, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) payments, and child assistance payments and the supplement for handicapped children paid by the province of Quebec.
• Gifts and inheritances. This includes life insurance policy death benefits.
• Lottery winnings.
• Compensation from various provincial programs for victims of a crime
• Gains from the sale of your principal residence

H&R Block is known for tax preparation. Not generally known is that it entered the Canadian desktop tax preparation market two years ago with H&R Block at Home. And in an interesting twist, it offers something few if any other tax preparation software companies can match: help from one of their tax professionals should you be called in for an audit of a return prepared with their software.

The program uses an interview process to set up the necessary forms and dialogs: you just check off a set of boxes and it builds a questionnaire, prompting you to fill in your information. For instance, if you check the "T4 and Employment Income (includes EI benefits)" box, a form will be generated for you to fill in the relevant information.

You can navigate using the Previous and Next buttons, or there is the QuickClik Navigator that shows all the pages or forms as you move through them. On the forms itself, added lines and items can be deleted – a small trash icon next to an item allows deletion after you confirm you want to delete something. The navigation sidebar allows you to tidy up as you move along by deleting some forms, as well.

Many Canadians hold stocks, bonds, and mutual funds. These are commonly recognized as capital property by the Canada Revenue Agency. These are property used solely to make money.

What you may not realize is that other items fall into this category, such as rental properties, your vacation home or cottage, and even collectibles. A capital gains (or loss) is realized when you sell capital property of any type.

Adjusted cost base

To calculate capital gains or losses, we have to calculate the adjusted cost base of a capital property. In addition to the buying price, expenses involved in buying and selling are added in. For real property, any improvements and additions are counted. For shares, you need to calculate the average cost of each share, which is important when you sell only part of your share holdings in a company.

Income tax in Canada is a progressive tax system. Sadly, the more we make, the more taxes we pay on additional income. This is based on the principle that the higher our income, the more able we are to pay taxes.

The marginal tax rate is the rate assessed against the income at the margins of your income. This does not increase the tax rate on all income earned, but only on additional income. The marginal tax rate is useful for determining the effectiveness of various tax strategies like your Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA). It also tells you how much to expect from any raise.

The average tax rate is simply the total of all taxes paid divided by the total income. This value is informational only, and has no official use.

Most Canadians pay their taxes through withholdings from various sources of income. Most of these processes are automatic and outside our direct control.

When you file your return, you add up all these sources, compare to the taxes you owe for the entire year, and then you either remit the difference (taxes owing) or receive the difference (tax refund).

Employment income
The most commonly source of withheld taxes will be your paycheque. Your employer will retain and remit taxes on your behalf. After the end of the year, your employer produces a T4 information slip (in Quebec, an RL-1 as well) summarizing the amounts withheld.

When you start a new job, you should fill out a Personal Tax Credit Return TD1 form to calculate tax to be withheld. If not filled out, the presumption will be only the basic personal exemption applies. It should be updated whenever there is a major change in your life, such as the birth of a child or marriage.

Note that should your income vary from paycheque to paycheque, the tax withheld will also vary – the calculations presume that paycheque's income throughout the year.

We all dislike filing taxes. Yet the vast majority of us end up doing so: in 2008, enough returns were filed that they covered more than 95% of the population of Canada, including minors. The simple reason for this is that the tax system has been set up so that we are forced to, or we will want to.

When you HAVE to file
The simplest reason: you owe the government money.

• You owe taxes. This could be because your employer did not withhold enough taxes (not an uncommon occurrence), or you had other income, such as a second job, a pension or self-employment income.
• You received Employment Insurance (EI) or Old Age Security (OAS) benefits and have to repay some of it.
• You have not yet fully repaid amounts you withdrew from your Registered Retirement Savings Plan (RRSP), for your Home Buyers Plan (HBP) or Lifelong Learning Plan (LLP).
• As a self-employed individual with net income over $3,500, you have to submit Canada Pension Plan or Quebec Pension Plan amounts.