Taxation can be complex, but understanding some of the key features of tax policy in Canada helps to make it easier to reduce your taxable income.
This guide will take you through steps you can take to minimize the amount of tax you pay. By understanding entitlements and deductions available when filing your taxes you can save yourself time, money, and stress.
Overview of Taxable Income in Canada
Taxable income in Canada is the income amount reported on an individual’s tax return that is subject to federal and provincial or territorial tax rates.
Any income not specifically listed as a non-taxable or exempt type of income will generally be considered taxable. Income sources can range from employment earnings, business profits, interest payments, capital gains, rental income and pension distributions.
In Canada, taxable incomes include various types of revenues from all sources of an individual’s life such as employment earnings, business profits and capital gains. To reduce one’s taxable income in Canada, there are several important strategies one can apply depending on their particular situation:
- Use Registered Retirement Savings Plans (RRSPs) to reduce taxes: By contributing to a registered retirement savings (RRSP) plan each year and claiming the related deductions on your tax return(s), you can reduce your overall taxable earnings by lowering the amount of Canadian taxes owed overall.
- Make pension contributions: Pension contributions are also deductible and can help reduce your taxable income while setting aside money for retirement.
- Report all eligible expenses: Many Canadians use the multiple deductions available to lower their total taxable earned income throughout a particular year. By reporting all possible expenses (such as eligible child care costs, home office expenses and moving costs), including deductions for taxes already paid in other countries for foreign earned incomes (non-residents). These specialized deductions must be done properly or else they may result in penalties or additional tax payments so it is always wise to speak with a registered tax preparation services before attempting any new forms of deduction from your own personal finances and/or professionals or recruiters prior to any new appointments overseas!
- Take advantage of credits available: There are multiple credit programs available in Canada that allow individuals to offset portions of their earned incomes with applicable deductions for certain sports/athletic activities, volunteer activities, medical costs incurred during hospital stays etc…By properly submitting documents/claims related directly linked towards such programs you’ll be able to unlock these additional opportunities and clear more money overall out at end-of-year when completing annual tax returns!
Maximizing Retirement Savings
Retirement savings plans such as the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) can help you save for your future, as well as reduce the amount of taxes you pay now.
An RRSP is a type of savings plan to which you can contribute up to 18% of your employment income from the previous year. Any amounts contributed are deducted from your income, reducing the amount on which you are taxed.
In addition, the earnings generated by investments inside an RRSP grow tax-free until withdrawal. This provides additional savings at tax time both on income earned in the current year and for contributions made for earlier years.
A TFSA works in a similar way but does not provide an immediate deduction from income when funds are contributed – instead it reduces taxes paid upon withdrawing funds at retirement age or during other times when one can access money held in their TFSA account without penalty.
Contributions made to a TFSA are not deductible against income and any resulting increase in value inside the account will be retained without taxation until withdrawn by the owner.
It’s important to work out how much money you may need during retirement and then consider maximizing RRSPs and TFSAs if possible. Working with an experienced financial advisor or accountant can help provide insight into various options available when planning for retirement, including how to best minimize taxes through retirement plan contributions while still setting aside enough money for future needs based on individual goals.
Home Ownership Strategies
Home ownership is one of the most effective strategies available to Canadians. The Canadian government offers incentives in the form of deductions and credits to encourage homeownership.
Homeowners may be eligible to claim certain expenses that are directly related to owning a home, such as mortgage interest, property taxes, and maintenance costs.
For instance, interest paid for a mortgage can be claimed on your taxes as long as it does not exceed the total loan amount. This deduction can be applied for up to five years from the date you took out the mortgage.
Property taxes are also deductible in most cases and include both local and provincial or territorial levies such as school or utility taxes. In some provinces, even 100% of these fees may be deducted from your taxes if you qualify for homeowner grants or relief programs.
Any necessary repairs or updates that have been made to increase a house’s energy efficiency can also be deducted from total taxable income up to $10,000 per year.
Finally, homeowners are eligible for a Home Buyers’ Amount credit where they may receive up to $750 in direct financial assistance towards purchasing a principal residence in Canada if they conform to specific requirements set out by CRA (Canada Revenue Agency).
Whether you’re considering buying your first home or just learning how to maximize your benefits as an existing property owner, there is significant potential here for reducing your taxable income.
One of the most commonly used methods for reducing taxable income in Canada is to make charitable donations. The Canada Revenue Agency (CRA) allows Canadians to claim a 15% non-refundable tax credit on the first $200 of eligible charitable donations, as well as an additional 29% non-refundable tax credit for donations over $200 made during the year.
A receipt is necessary in order to take advantage of both these credits, and it is important to remember that all donations must be made to eligible charities or other organizations prescribed by the CRA (such as universities, hospitals and cultural groups).
Furthermore, the receipts can be carried forward up to five years if not used in the present year. It is a great way to give back while reducing your taxable income.
Want to find out how to how to properly calculate your income tax? Click here for more infomation about that.
Business Ownership Strategies
Incorporation allows business owners to access the small business deduction – which can lower tax rates for businesses with annual gross revenues below $500,000.
Businesses that meet certain conditions may also be eligible for the Canadian-controlled private corporations (CCPC) deduction in addition to reduced tax rates on their first $500,000 of active income.
Partnership structures provide considerable flexibility when it comes to taxing business profits periodically by distributing profits or losses among partners in accordance with predetermined criteria.
In some cases, partners’ pro-rata income is less than their share of the partnership’s income and so they may receive a much smaller taxable income than if they had earned the same amount as an individual taxpayer.
This can be especially beneficial when one partner has a higher marginal tax rate than another as it allows them to save money through efficient structuring procedures.
Business owners can also select eligibility for carrying forward losses – either current year or past years – and thus get protection from fluctuating incomes over time.
Additionally, entrepreneurs have access to specific federal and provincial regulations supporting research and development expenses which allow generous deductions from personal taxes if those expenses are linked directly with their venture’s activities in Canada.
Ultimately, reducing your taxable income in Canada is possible through a combination of simple tax credit claiming, creative thinking, smart planning and strategic moves.
Remember to explore the different options available to you and evaluate them based on the advantages they offer and any costs associated with them.