There’s an old adage that goes something like, “What’s the difference between tax reduction and tax evasion? About five years in jail.”
As a Canadian, you have the right to reduce the amount of income tax you pay, but what you can’t do is evade taxes. Even rich folks with accounts in Panama can get caught in the end.
Here are a six ways to lower your tax bill with a clear conscience.
1. Start with the obvious: Tax-preferred accounts
Canada has two national programs that help you save on taxes in the short- and long-term. Both are highly effective if you strategically use these accounts to save money and invest in your future.
Registered retirement savings plans (RRSPs)
The federal government will let you shelter up to 18% of your earned income in an RRSP, where it can grow tax-free until you take it out of the plan, typically when you retire.
In the short term, every dollar that you contribute to your RRSP gets deducted from the amount of income you declare. This could result in a big, fat income tax return that you can spend any way you please.
Learn all about RRSPs and how to get started using this tax-efficient savings tool, using the Money.ca guide.
Tax-free savings accounts (TFSAs)
TFSAs won’t save you any money on this year’s tax return but they can save significant money by helping reduce your taxable income, over time.
You can put money into a TFSA, invest it and keep all the profit if your investments go up. Anyone over the age of 18 can open one of these tax-free account and start contributing money up to the annual limit set by the government.
To learn how to get started, check out the Money.ca guide on TFSA strategies.
2. Dig for deductions
The Canada Revenue Agency (CRA) is continually adding new deductions to the tax code. For example, new measures were implemented during the COVID-19 pandemic that allowed you claim home office supplies as a tax deduction if you were asked to work from home.
While the COVID-19 work from home deduction no longer applies, there are plenty of other deductions and credits to review and consider — or use tax software that can point out tax credits and deductions that help you save money.
Fun fact: You could earn $400 an hour: If you spent two hours researching tax deductions and you saved just $800 on next year’s tax bill, then the time spent finding these savings works out to $400 an hour — about how much a lawyer earns.
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3. Make taxes a family affair
Married couples and parents with children often qualify for tax deductions that aren’t available to single people with no kids. If you aren’t confident in your ability to identify all the savings you deserve, have a tax professional prepare your return. If they find even one additional deduction, it’s well worth the fee.
4. Talk to human resources
If you work for a company that still has a human resources department and offers employee benefits, you’re lucky. Book some time with your human resources (HR) administrator to review all the programs and incentives you can sign up for in order to reduce your taxes today or down the road when you retire. Taking advantage of things like group savings and insurance plans is almost always in your best interest.
5. Work your side hustle
If you’re self-employed or running a side hustle, you could be able to write off your work-related expenses. As long as you earn money for what you do, any reasonable business-related expense can be claimed as a deduction. Keep in mind that a “tax deduction” is not a refund. You simply get to reduce the income you declare, so you get taxed on a smaller amount.
6. Start saving today, before the April 30 tax deadline
The deadline to file your income tax return is April 30. That gives you plenty of time to start exploring ways to lower your tax bill. To help, here are eight tax software programs that can help you file by the deadline and maximize your tax deductions and savings.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
