Everybody hates taxes, am I right? It doesn’t matter if you are rich or poor, barely making ends meet, or raking in heaps of cash, the CRA will come for their piece of your income.
After years of helping to prepare taxes for friends and family, the only thing I’ve seen that makes this financial obligation a bit more bearable is finding as many tax breaks as possible.
If you want to learn how to pay less tax in Canada, I hope these tips will help you out.
There are a number of (legal) ways to pay less tax in Canada. But relatively fewer people take advantage of all the credits and deductions that CRA permits, and that can lower your tax bill significantly. It’s mostly because a lot of people don’t even know where they can save on taxes.
But if you are determined to learn how to pay less tax in Canada, this article will hopefully identify at least some of the ways which apply to your particular situation.
1. Child Care Expense
Summary: If you have children, you can deduct childcare expenses from your tax bill.
If you and your spouse works and no one is home full-time to take care of the child, the chances are that you are paying a lot of money for daycare expenses. While that’s a necessary expenditure, you can lighten the burden a bit by claiming these expenses on the tax returns. The spouse/parent with the lower income has to claim these expenses on their returns.
You can claim up to $8,000 a year for a child aged seven or younger, and $5,000 for children between seven and sixteen. You can claim daycare, nursery, nanny, caretaker, and boarding school expenses. Make sure you ask for receipts and SIN numbers from these service providers.
2. Maximize RRSP Contribution
Summary: RRSP contributions are tax-deductible and can lower your tax bill by thousands of dollars.
Save for your future and contribute to your RRSP. Not only will your investments grow in a tax-free environment, but you can also lower your tax bill significantly. However, it’s not purely tax-free, and you will have to pay taxes on it once your RRSP matures, but you can convert it into an RRIF and reduce your tax burden.
The 2022 maximum RRSP contribution is $29,210, or 18% of your income, whichever is lower. See this list for updated numbers.
3. Spousal RRSP Contributions
Summary: Lower your tax obligations by contributing to a spousal RRSP.
If you are in a higher tax bracket than your spouse, you can maximize your tax break by contributing to a spousal RRSP (within your contribution limit for the year). Your contributions will not affect the available contribution room your spouse or common-law partner has.
Its benefits are two-fold. If your spouse earns less than you and is in a lower tax bracket, they wouldn’t have gotten a tax break as big as yours, even if they fully contributed to the RRSP on their own. Also, when your spouse finally withdraws from the RRSP (or RRIF), they will be in a lower tax bracket than you and pick up a lighter tax bill.
4. Claim Medical Expenses
Summary: Several medical expenses that are not covered by your insurance are tax-deductible.
If you or a dependent incurs medical expenses that aren’t covered by your insurance, you can claim them on your tax returns and lighten up your tax bill. Many of these expenses can be pretty hefty, like full-time and specialized care. You can claim the entire amount on your tax returns.
Apart from care, expenses like prosthetics, insulin, insulin pens, hearing aids, eyeglasses, contact lenses, vitamins, etc. For some of these, you need a medical prescription to claim the deductions.
5. Donate Generously (And Smartly)
Summary: Donations are a non-refundable tax credit and can reduce your tax bill.
Donations help you earn both provincial and federal tax credit, and can help offset your tax bill. You not only get to claim the tax credit on donations for the current year but also claim tax credits for donations up to five years back if you have proof that you donated to eligible entities.
Since it’s a non-refundable credit, you should only use this deduction for years where your tax bill is expected to be higher. A smart move is to donate securities that have accumulated capital gains directly. You won’t have to pay any tax on capital gains, and your tax charitable credit will be a bit higher.
6. Split Your Pension
Summary: Splitting a pension with a spouse or common-law partner can reduce your taxable income.
You can split your CPP pension by up to 50% with your spouse, depending on how long you have lived together. The pension split only makes sense when you are 60, and the income and tax bracket of one spouse is higher than the other. By splitting the CPP, the higher tax-bracket spouse can lower their taxable income. CPP splitting goes both ways. You can also split RRIF income, but the rules are different.
7. Transfer Tax Credit To Your Spouse
Summary: Some federal tax credits can be transferred between spouses
If your spouse or common-law partner has certain tax credits, but their tax obligation isn’t high enough to be canceled out to zero if they apply all the tax credit towards it, they can transfer the excess to you.
These expenses include tuition, education, and textbook amounts, pension amount, disability amount, age amount, and caregiver amount. This can help the high-income spouse offset their tax obligation, resulting in an overall lenient tax burden on the couple.
8. Contribute To RESP
Summary: Contributing to an RESP account can help you save for your child’s education tax-free.
While an RESP doesn’t lessen your tax obligation right away, it’s a powerful financial tool. Instead of paying for your child’s post-grad education with your taxable dollar, you can contribute to an RESP. It will still be with your post-tax dollars, but the money in the RESP will grow tax-free. At max, you can contribute up to $50,000 to an RESP, that’s equivalent to $2,500 a year for 20 years.
In the right investment vehicle (that offers 5% returns a year as an example), it can grow to $89,000. Plus, the $7,200 you will get from the government through matching contributions. The money is taxable when taken out, but since your child is likely to be in a lower tax bracket, their tax obligation will be close to zero.
9. Home Office Tax Credit
Summary: Working from home can make you eligible for significant tax breaks.
For self-employed individuals, home office expenses can also be a decent amount of deduction. You can claim the portion of your home (based on square footage) that you use as your home office, on your tax returns.
So if it accounts for 15% of the total space, you can claim 15% off on your utilities, insurance, mortgage interest, and property tax. You can even claim part of the wages you pay to the individual who provides cleaning services in your home. Stationary can also be claimed, but not capital expenses.
10. Employ In-House
Summary: Hiring your child and spouse can lower your tax obligation.
If you run a business, and you want to inflate your business expenses (legally), enough to lower your taxable income, a smart way is to hire your child or spouse in the business. Be warned that it’s something that CRA monitors closely, and you can’t just pay out a salary to your family members based on a pretend position. They must provide valuable service to the business (even if it’s as your assistant), and they have to be compensated fairly.
Summary: Once your business income grows beyond a certain point, it makes sense to get incorporated.
Some small businesses grow large enough that it makes more sense (tax-wise) to incorporate them because otherwise, the business income will push you in the top tax bracket. But it requires rigorous cost-benefit analysis. If the cost of incorporating your small business (or even a side hustle) outweighs the tax break you will get by incorporating; it doesn’t make financial sense to do so.
Summary: Used effectively, it can be the most powerful tax-management tool you can have.
TFSA contributions aren’t tax-deductable like RRSP, but since whatever comes out of your TFSA is tax-free, if you have accumulated enough wealth in it, you can reduce your taxable income substantially, especially in your retirement years. For example, instead of withdrawing more than the minimum from your RRIF (which is taxable), you can withdraw from your TFSA and enjoy your stay in the lower tax bracket.
Effectively using your registered saving accounts, choosing the right securities to invest in, accounting for all child-related tax credits, benefiting from spousal tax privileges, and business-related tax-breaks – All of these can help push your tax bill to a more reasonable and manageable magnitude.