How To Reduce Income Tax Canada

Taxes can seem overwhelming to most people as they can seem very complex, and most people cannot utilize the framework to the best of their advantage. However, there are many exciting ways available to Canadians to lower their taxes and increase their spendable income or, more importantly, investable income.

The Government of Canada offers numerous tax deductions to its citizens to help them save taxes if their earnings or investments align with the government’s objectives, strengthen the Canadian financial markets or help them make it easier to build a retirement corpus.

Broadly speaking, tax-saving tools available to Canadians are called credits and are of two types, refundable credits and non-refundable credits. While the latter can be claimed directly in your tax return, the former are processed as a refund after you pay your taxes.

Reducing Your Income Tax in Canada

We can divide the various credit into categories such as Investment/Insurance, Employment-related, and Personal/Family Taxation.

Under the Investment/Insurance section, the following tax credits are available to Canadian taxpayers.

Lowering Income Tax With Investments

 

Registered Pension Plan (RSP)

The Registered Pension Plan is a contribution made by your employer towards your pension. The cumulative contributions are transferable and move with you as shift jobs. These contributions are tax-free and are made towards your retirement. In the event that you need such funds before retirement, they can be withdrawn but are subject to income taxes if you choose to do so pre-retirement.

Registered Retirement Savings Plan (RRSP) Contributions

The RRSP is only slightly different from the RPP mentioned above because it comprises investments that you make towards your retirement in an individual capacity; taxation rules remain the same in the event of pre-retirement withdrawals. However, RRSPs are limited to an annual limit, about C$27000 or 18% of the income reported in the previous financial year, whichever is lower, to prevent misuse of this facility. Check out some of the best investments for your RRSP.

Capital Loss

Capital Losses such as those that arise from investments or business losses. Such losses can be from investments such as real estate or stocks. A loss-making business in which you are the proprietor also counts. However, these losses must be offset against capital gains and hence are allowed to be carried forward or back depending on whether you and any capital gains in the year in question. You can carry losses back up to 3 years. In the case of business loss, it can be deducted from income, and you needn’t wait for capital gains for offsets.

Cumulative Capital Gain Reduction

Cumulative Capital Gain reduction is an exemption on the sale of qualified property such as fishing or farm properties. The sale of shares of small businesses is also included. Under the scheme, only half the limit of the scheme is taxable, C$1M in the case of fish/farm property and C$883k in the case of small businesses.

Employment-Related Security Deductions

As an employee, if your business chooses to pay part of your compensation in terms of shares or stock options, you can purchase by yourself below fair market value (FMV). As the shares are awarded or options are exercised, allowing acquisition of shares below market value and the following sale results in a profit, you incur a capital gains tax. However, you can claim half the profit from the sale of these securities as a deduction.

Exploration and Development Expenses

In order to make exploration of minerals and energy resources more cost-effective for businesses, the government allows them to raise capital through a mechanism called Flow-Through-Shares, where the costs of such exploration and development flow through directly to investors. If you invest in such shares, you can get a 100% tax credit for the amount of the investment and another 15% towards any expenses incurred while making such investment.

Investment-Related Expense Deduction

If you incur any expenses relating to carrying an investment, such as expense ratios for an ETF or management fees for a mutual fund or REIT, only one is held in RPPP or an RRSP, not ones held outside. Further applicable deductions include any charges related to the filing of tax returns or any expenses incurred from various activities such as those from recovering debts, etc. Lastly, any charges incurred due to compliance requirements with tax authorities.

How to Lower Personal & Family Income Tax

Now, we will look at Personal/Family Taxation –

Charitable Donations

All charitable donations are tax-deductible in Canada; you must have a receipt of the donation to claim it on your taxes.

Basic Personal Amount Deduction

Every Canadian citizen is entitled to a basic tax deduction based on their level of reported taxable income. For example, up to C$151,000, you can deduct about C$13000, from C$151,000 to C$261,000, the amount is about C$12,000; you can check your deductible based on income here.

Age Amount

If you are a senior citizen at least 65 years of age, you can make additional deductibles of about C$7,700 if you make about C$38,000, and different amounts depending upon your income level. You can check your deductible based on the link above.

Spouse or Lawful Partner Amount

If you have a spouse who makes an income equal to or less than the Basic Personal Amount Deduction of the tax filer, you can claim the deduction against your taxable income. Ou can also transfer part of your income to your wife if they are in a lower bracket than yours to get a cheaper net tax rate.

Amounts as a Caregiver or for an Eligible Family Member

These deductions are of two types. First, if you are a single parent, you can claim expenses related to raising a child, such as those related to health or education, against your income. If you are a caregiver to an elderly, disabled family member whose adult or child, you can claim these expenses incurred against income. These deductions include any expenses you might incur towards their living conditions, such as home renovations, etc. The number of levels of these deductions depends on income levels and certain specifics that you can check here.

Home Buyer Deduction

If you were a buyer of a home either on your own, with your spouse, or only by your spouse, you could claim up to C$5000 in-lieu of this purchase. To qualify for this, you must be a first-time home buyer, or at least, you or your wife must have owned or lived in a house you both, either individually or jointly, owned over the past four years preceding the filing.

Adoption Deductibles

Suppose you adopt a child younger than 18 years old. In that case, you can deduct a maximum of about C$16,200 against any expenses incurred during adoption, such as basic miscellaneous expenses, educational ones, or legal/formal expenses.

Education-Related Deductibles

You can deduct interest payments towards student loans from your income over the past five years. You can also deduct expenses related to travel, educational materials such as books, courses, etc. You can check the specifics of deductibles here. Lastly, as a parent, if you have overestimated your child or grandchild’s educational expenses, you can deduct the extra amount against your taxable income.

Medical Deductibles

In the unfortunate situation where you have to undergo healthcare expenses for yourself or your family, you can claim those expenses as deductible against your taxable income—details of levels and permissible deductible here.

Employment Related Income Tax Deductions

Lastly, we now look at Employment-Related Deductions –

Union or Professional Dues

Such deductibles pertain to any expenses incurred by being a part of a union or employee association. Other deductions under this scheme include expenses towards being a board member of a company, such as personal liability insurance, or in the case of doctors, deductibles include malpractice insurance.

Moving Expenses

These deductibles include any expenses incurred toward employment or education. In addition, if you incur expenses due to the disposition of a location over 40 km for the reasons listed above, you deduct them from your taxable income.

In the case of employees, it is only claimable if they move to a new location for work, whether under their current or new employer. However, self-employed citizens can claim it if they relocate their business to a new area.

Other Expenses Reduction

Expenses such as GST or HST that a citizen was required to incur to generate income from employment can be deducted from taxable. However, such expenses are only deductible if they were necessary for employment and not compensated for by the employer. If you are forced to resort to any action to claim your earned salary, you may claim expenses from those actions against income.

As an employer, if you are obligated to pay any wage-loss benefits or worker benefits, you can deduct them against income, but only to the maximum limit of wages paid the previous year. Lastly, any expenses you incur as an employer as a result of profit-sharing agreements between you and your employees are deductibles.

Clergyman Deductions

If you serve a religious organization, you can deduct any allowance you get from these organizations from your taxable income.

Canadian Forces and Police Personnel Deduction

If you serve in the police or Canadian National Forces in high-risk zones or areas for a certain amount of time, you are allowed certain deductions against your income in lieu of your services.

Volunteer – Emergency/Fire/Etc.

If you serve as a volunteer in an emergency for fire or search and rescue, you can claim about C$3000, assuming you put in at least 200 hours of service over the financial year.

Lastly, while this is not part of the tax code, you can incorporate a company to house your services in the case of you being a freelancer, which earns the revenue for your services. This is beneficial as you can write off certain expenses as perks, such as a car, and pay a lower tax rate. However, there are limits to which you can these benefits; eventually, you must pay personal income tax on any earnings you declare as dividends or personal income taxes on any salary you draw from the company. You will also have to incur expenses to incorporate and maintain an active company.

Final Thoughts

As you can see, there are various specifics available to all taxpayers to claim deductibles against your income that you might not have known about. Such saved capital can help you invest better for your future and compound tremendously over time.

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When a Canadian-controlled private company claims the deductibility of small businesses, the income of qualified Canadian companies is taxed at a special reduced rate, with a corporate tax rate of 9%. In 2019, this tax deduction will be nine percent, meaning you will have to pay an even lower corporation tax rate on your income. Therefore, as small businesses grow, integrating them may make more tax sense, as corporate income will push you into the top tax bracket.

The Canadian Tax Office allows you to deduct the amount of tax you owe based on your taxable income. In addition, there are several ways for entrepreneurs to optimize their tax payments, reduce taxes and retain resources for the company. You can use these strategies to reduce taxable income and save taxes for your business in Canada.

If you contribute $27,180 to your RRSP and have 18% of your annual income, you can deduct from your tax bill $11,800 based on the Ontario tax rate. This is because the amount of RRSP contributions you make to reduce your income tax bracket equals your taxable income minus the RRSP threshold, the next lowest tax bracket. Since RRSP is a registered pension saving plan, contributions are tax-deductible, but income gains from RRSP are not taxable.

Small business owners, sole traders, and partners earn an excellent income tax deduction by registering a retirement savings plan (RRSP) or tax-free savings account (TFSA). In addition, splitting your income with your spouse and contributing to your pension account can help reduce your tax bill if there is a big gap in your income. This is because contributions to an RRSP are not tax-deductible but come from your TFSA and are tax-free, and if you accumulate enough assets in your TFSA, you can reduce your taxable income in your retirement years.

The attribution rules of the Income Tax Act prevent Canadians from splitting the money, so if you give a portion of your income to your spouse and assign it to you, you will be taxed at a higher rate. Income splitting at the mandatory interest rate is a borrowing strategy that is most effective for wealthy Canadians in higher tax brackets but can benefit the average Canadian.

How to Lower My Income Tax Amount in Canada

At the end of the year, due to several factors, the amount deducted or transferred on your behalf to the CRA will be closer to your total income tax amount, resulting in you paying more income tax or filing less.

Another way to reduce your tax burden is to provide your spouse with a credit at the interest rate required by Canada as of January 1, 2016. If your spouse invests the loan proceeds in a business or a high-interest investment such as shares or real estate, the profits from the investment are included in taxable income. Interest paid on loans, the purchase of shares and other income-generating investments can be deducted in Annex 4 of your tax return. If your house or property is owned by an entrepreneur, mortgage interest and property tax can also be deducted.

Operating expenses that are reasonable to pay on earned income are deductible for income tax purposes but are prohibited under specific provisions of the Income Tax Act. For example, if you take customers out for dinner, you can deduct this as legitimate business costs to save on taxes. Expenses incurred on or after the date of incorporation are tax-deductible, as long as a reasonable amount is attributable to the income generated by the company.

In a given tax year, entrepreneurs can use a large part of the Cost of Capital Allowance (CCA) to claim an amount to transfer unused shares to reduce future tax bills.

If your company has a capital loss defined as costs that exceed your income for the fiscal year, think about whether you can use the CCA to reduce your income tax bill if you use it.

Understanding the tax treatment of capital gains from unregistered savings accounts can help minimize the taxes you pay to put more money in your pocket. However, depending on your tax bill and the inflation rate, it can cost you money to keep your money in taxable fixed-rate investments. The above tax savings tips are examples of how to reduce taxable income legitimately and sustainably.

It allows you to organize and evaluate the cost-saving measures you can take to reduce your future corporate and corporate taxes before the end of the tax year. For example, using your registered savings account, choosing the suitable securities to invest in accounts, child-related tax credits, benefits, spousal tax privileges, and business tax breaks can help keep your tax burden to a reasonable and manageable level. In addition, many wealthy Canadians run subsidiaries of their businesses to benefit from lower tax rates, deductions and tax-deductible individual retirement plans.

The top strategy for lowering your taxes and keeping more money in your business applies to individuals who run a sole proprietorship or partnership and file their income tax with a personal income tax return.

Fees paid to your tax advisor to prepare your individual income tax return may be deducted from any reported capital gains, rental income and business income on your tax return. In addition, in the case of eligible company purchases, they can be used as an income tax deduction, which can reduce your taxable income in reasonable circumstances.

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