Saving money on taxes in Canada can be a great way to keep more of your hard-earned money in your pocket. The year is nearly ended and the beginning of the tax season is upon us. Here are eight tips to help you do just that:
1. Take advantage of tax deductions and credits
There are many tax credits available to Canadian taxpayers that can help reduce the amount of tax you owe. Here are some of the most important tax credits in Canada:
The Basic Personal Amount
This credit allows you to earn a certain amount of income tax-free. For the 2022 tax year, the Basic Personal Amount is $14,398.
The Canada Child Benefit
This Child Benefit Credit provides financial support to families with children. The amount you receive is based on your family’s income and the number of children you have.
The Age Amount
This credit is available to seniors who are at least 65 years old. The amount you can claim depends on your income and the amount of eligible pension income you receive.
The Disability Amount
This credit is available to individuals with a severe and prolonged impairment in physical or mental functions. The amount you can claim depends on your income and the amount of eligible disability support you receive.
The Medical Expense Tax Credit
This credit allows you to claim eligible medical expenses you or your family members incur. The expenses must be more than 3% of your net income or $2,397 (whichever is less) in order to be eligible. To optimize for the highest possible credit, you can put the medical expense on the taxes of the individual in the couple earning the least.
Overall, there are many tax credits available in Canada that can help reduce the amount of tax you owe. By familiarizing yourself with these credits and claiming them on your tax return, you can save money on your taxes.
2. Use Registered Savings Plans
Registered savings plans, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), can help you save on taxes by allowing you to earn investment income tax-free. Contributions to these plans can also be claimed as deductions on your tax return. This further reduces your net revenue and therefore the amount of tax you owe. Once invested, they can fructify away from any taxation. That said, upon withdrawal RRSPs and RRIFs are subject to withholding tax implications. TFSAs can be freely withdrawn, as long as it’s not overdone in the same tax year.
3. Consider tax-efficient investments
Canadian dividends and capital gains are taxed at different rates in Canada.
Dividends are payments that corporations make to their shareholders out of their earnings. In Canada, dividends are taxed at a lower rate than other forms of income, such as interest and employment income. The exact rate of tax you’ll pay on dividends depends on the type of dividends you receive and your personal income tax rate.
Capital gains are profits you earn when you sell an asset, such as a stock or a piece of property, for more than you paid for it. In Canada, only half of your capital gains are included in your taxable income. This means that the tax you’ll pay on your capital gains is only half of what you would pay on other forms of income.
Overall, Canadian dividends and capital gains are taxed at lower rates than other forms of income. By choosing investments that generate these types of income, you may be able to save money on your taxes. It’s important to note, however, that tax rates and rules can change.
Canadian dividends are taxed at a grossed-up but credited rate which makes the calculation rather complicated. It’s good to keep in mind that the result is a rate between the capital gains rate and the revenue rate for people in the higher tax brackets. It is slightly lower for people in the lower tax brackets (ie $53k or less).
4. Keep good records
Proper record keeping is important for saving taxes because it allows you to accurately claim deductions and credits on your tax return. When you have good records, you can easily provide the Canada Revenue Agency (CRA) with the information they need to verify that you are eligible for the deductions and credits you claim. This can help you avoid potential audits and penalties. It also ensures that you pay the minimum amount of tax required by law.
It goes without saying, good record keeping is essential for saving money on your taxes in Canada. By keeping accurate records of your income, expenses, and other relevant information, you can claim deductions and credits accurately. You can also be better prepared for audits and avoid penalties.
5. Claim work-related expenses
There are many work-related expenses that you may be able to claim on your tax return in Canada. These expenses must be directly related to your job, and you must have paid for them yourself (or been reimbursed for them by your employer). Some common examples of work-related expenses that you may be able to claim and get a tax refund for include:
Tools And Equipment
If you have to purchase tools or equipment in order to do your job, you may be able to claim these costs as a deduction. This could include things like a computer, cell phone, or specialized tools and equipment that are required for your job.
Uniforms And Clothing
If you have to wear a uniform or special clothing for your job, you may be able to claim the cost of these items as a deduction. This could include things like a uniform, safety gear, or protective clothing.
Travel And Transportation
If you have to travel for work, you may be able to claim the cost of your transportation as a deduction. This could include things like airfare, train tickets, or the cost of gas for your vehicle.
Meals And Entertainment
If you have to entertain clients or attend business meals, you may be able to claim a portion of the cost as a deduction. This could include things like the cost of meals, drinks, or tickets to events.
Overall, there are many work-related expenses that you may be able to claim on your tax return in Canada. Be sure to keep receipts and records of any expenses you incur, as you’ll need to provide this documentation to the Canada Revenue Agency (CRA) if you want to claim a deduction. A tax professional can also provide advice on which expenses are eligible for a deduction and how to claim them on your tax return.
6. Donate to charity
Donations to registered charities can be claimed as deductions on your tax return, reducing the amount of tax you owe. Keep in mind that the charity must be registered with the Canada Revenue Agency (CRA) in order for your donation to be eligible for a tax credit. You can file the amount donated to charity on the line 34900 of your T1 General Form.
7. Take advantage of tax credits for students
If you or a family member is a student, you may be eligible for education-related tax credits. These credits can help offset the cost of tuition, textbooks, and other education-related expenses.
8. Get professional help
If you’re not sure how to save money on your taxes or you have a complex tax situation, consider getting professional help from a tax expert. A tax professional can help you maximize your deductions and credits, ensuring you pay the minimum amount of tax required by law.
Overall, there are many ways to save money on taxes in Canada. By taking advantage of deductions, credits, and registered savings plans, as well as making tax-efficient investments and keeping good records, you can reduce the amount of tax you owe. Additionally, claiming work-related expenses, donating to charity, taking advantage of tax credits for students, and getting professional help can all help you save money on your taxes.
