Pretty much everyone wants to find legitimate ways to reduce their tax burden. The rules change every year and it can seem confusing. Here are a few ways you can consider to reduce your Canadian tax assessment .
Investments
RRSP – Contributions to a Registered Retirement Savings Plan means that you won’t be paying any tax on that money during the year you contribute to the investment. So, putting the maximum amount of money into this plan each year is a good idea. In addition, any tax on gains are not taxable until withdrawal, which is mandatory at age 71.
TFSA – Tax Free Savings Accounts are another good investment. The contributions are made with money you have already paid tax on and any interest, dividends, and capital gains are all tax free. In fact, they are tax free forever, along with any withdrawals you make. Some people are withdrawing money from their TFSA account and giving it to their children who are 18 or older and these children are then funnelling the money into their own TFSAs. All of that investment income is tax free and the kids are inheriting the money before their parents die.
Open a Business
Start – If you have been considering turning your hobby into a money maker, that is an excellent idea. Deductions can include the business use of your vehicle, space dedicated to your home office, salaries (even paid to a spouse or child), and supplies needed to manufacture or operate the concern.
Incorporation – If you are already running your own business or are a freelancer, you might want to consider incorporating. For 2019 the small business tax deduction rate was only 9% after the federal tax abatement. So, if the corporation made the money (rather than the individual) the tax rate is lower. There are also benefits of individual pension plans that are tax deductible. Just consult with a lawyer or financial adviser first. There is a fee to incorporate plus you will need financial statements and the corporation will need to file its own tax return. All of that may cost more than it is worth, not to mention the extra time and effort it will take.
Family Tactics
Income Splitting – This is a maneuver that works when there is a significant difference in the spouses’ incomes. This needs some professional advice and planning. Speak with a financial advisor before making any decisions.
Investing – If the incomes are unequal, another idea might be to pay all the expenses from the higher salary and simply invest all the income from the lower salary.
Loans – If you have the inclination to loan your child some money, you can set up a CRA-approved interest rate on that loan. The child must pay at least that interest rate each year and the loaned amount is taxed to them. If they don’t earn any income, it is taxed at the lowest rate. Again, check with a financial person to be sure this is handled properly and legally.
The short answer to saving money on your taxes is to consult with an accountant to see which tactics might work best for you under your circumstances.
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- The Capex Team