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 are 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, which may result 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 so that they can 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 so that you can 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, deduction 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.