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, many exciting ways are 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.
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 is processed as a refund after you pay your taxes.
Reducing Your Income Tax in Canada
We can divide the various credit into investment/Insurance, Employment-related, and Personal/family taxation categories.
Lowering Income Tax With Investments
Under the Investment/Insurance section, the following tax credits are available to Canadian taxpayers.
Registered Pension Plan (RSP)
The Registered Pension Plan is a contribution made by your employer toward 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. If you need such funds before retirement, they can be withdrawn but are subject to income taxes if you choose to do so pre-retirement.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 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 of about C$27000 or 18% of the income reported in the previous financial year, whichever is lower, to prevent misuse of this facility. Nevertheless, there are some great benefits of an RRSP; speak with your financial advisor to learn if they are right for you. Then, check out some of the best investments for your RRSP.
One of the main disadvantages of registered education savings plan is contributions can’t be deducted from income; this is where RRSPs are useful in reducing tax obligations.
Capital Losses such as those that arise from investments or business losses. Such losses can be from assets 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 can 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 with shares or stock options, you can purchase below fair market value (FMV). As the shares are awarded or options are exercised, allowing the 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
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 an 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 one held outside. Further applicable deductions include any charges related to filing tax returns or any expenses incurred from various activities, such as those from recovering debts, etc. Lastly, any costs incurred due to compliance requirements with tax authorities. Calculating Aggregate Investment Income is important to ensure you claim all the credits you can on your taxes.
How to Lower Personal & Family Income Tax
Now, we will look at Personal/Family Taxation –
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.
If you are a senior citizen at least 65, 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. You 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. 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, held over the past four years preceding the filing.
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, educational, or legal/formal expenses.
You can deduct interest payments towards student loans from your income over the past five years. You can also deduct expenses related to travel and 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.
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 company board member, such as personal liability insurance, or in the case of doctors; deductibles include malpractice insurance.
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 above reasons, 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 jobs 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 due to profit-sharing agreements between you and your employees are deductibles.
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 place of your services.
Volunteer – Emergency/Fire/Etc.
If you 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 if you are 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 incur expenses to incorporate and maintain an active company.
As you can see, various specifics are 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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