Are you one of those people, who always ask ” can we pay less taxes this year” while reviewing their tax returns at the beginning of the year but after that, many of them put this question aside and forget about it. Reducing personal tax in Canada is a year long exercise as long as you plan ahead and understand what you can do from the beginning of the year. This can be achieved through various legitimate strategies but you may have to start from now. Here are some common way that individuals can consider:
Take advantage of tax deductions: Maximize the use of tax deductions available to you, such as contributions to Registered Retirement Savings Plans (RRSPs), which can reduce your taxable income. Other deductions include childcare expenses, medical expenses, and charitable donations. For example,other than normal medical expenses paid from your own pocket, there are other medical costs for hearing aids, eyeglasses, contact lenses, etc. In order to maximize the tax credit on the eligible medical expenses, you may have some flexibililty to manage your medical spending within any 12 months of the year so that the total accumulated eligible medical costs can be very high. As a result, the higher tax credit can be achieved. One note that you need to pay attendtion is that like medical expenses and charitable doantions, those expenses provide non-refundable credits, you should only utilize it when your tax bill is expected to be higher. If not, all your efforts may be a waste.
Utilize tax credits: Explore and claim tax credits that you qualify for, such as the Canada Employment Amount, the Climate Action Incentive, the Disability Tax Credit, and the Tuition and Education Amounts. Avaiable tax credits are good but they are conditional. For example, the disability tax credit can be used by qualified individuals or transferred to spouse or families. But it needs the CRA’s blessing before putting it through and the process is tedious.
Split income: If you have a spouse or common-law partner with a lower income, consider income-splitting strategies to shift some of your income to their tax bracket. This can be achieved through methods like a spousal RRSP, where you contribute to their retirement savings.Spousal RRSP works like this. If your spouse’s income is lower than yours at a lower rate, when reaching at retirement age, their income tax bracket likely stays at the same level, then the RRSP income will be taxed at a lower rate instead of higher rate that you may maintain.Furthermore,in some situation, withdrawl seems un avoidable,when your spouse withdraws from the RRSP (or RRIF), their tax rate will be lower than yours, resulting in reduced tax payments.
Capital gains exemptions: Take advantage of the capital gains exemptions available on the sale of certain assets, such as your principal residence. This can help you avoid or reduce the taxes owed on any gains. Also, there may be an opportunity to defer the gain if the situation applies.
Utilize Tax-Free Savings Accounts (TFSA): Contribute to a TFSA, where any investment income or capital gains earned within the account are tax-free. This can help you grow your savings without incurring additional taxes.
Understand tax brackets: Familiarize yourself with the income tax brackets and rates in Canada. By managing your income to stay within a lower tax bracket, you can potentially reduce your overall tax liability. If you are salaried only, then the flesbility in shifting your income becomes limited.
Negotiate with your employer: another way to reduce personal taxes is to claim employment expenses but if you are on salary and work away from office, you may be eligbile to claim home office expenses or work related expenses like automobile expenses incurred for the business. Speak to your employer and likely you may be allowed to claim those expenses with a signed T2200 from your employer.
The last point, plan for deductions and credits in advance: Keep track of your eligible expenses throughout the year and save receipts, invoices, and other supporting documents. Getting all paper organzied will help you accurately claim deductions and credits when filing your tax return. Without those, your dedicated accountant may take a risk to claim the tax credits for you.
It’s important to note that tax planning should be done in consultation with a qualified tax professional or accountant who can provide personalized advice based on your specific financial situation and goals.
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