If you look to some of the wealthiest Canadians today, there is all one thing they have in common. They find ways to avoid paying the government income tax. Whether or not you believe in this is beside the point, but it is no secret that finding ways to pay less to the government will ultimately make you wealthier over time.
Whether it be provincial taxes or taxes paid to the federal government, they give us plenty of opportunities when it comes to tax breaks, tax credits, and tax deductions. However, many Canadians, especially those that choose to file their own taxes and not seek the help of an accountant, miss obvious tax deductions.
In this article, we're going to go over how to not only make the most out of your tax return, but also your investments when it comes to learning how to pay less taxes in Canada.
Simple ways to pay less taxes in Canada
Hire an accountant
It's not surprising that this is the first option on this list, as I did mention it in the introduction. Hiring someone experienced in filing tax returns for Canadians can benefit you in three main ways.
- They will make sure you aren't making any glaring mistakes when you file taxes
- They have more expertise when it comes to filing taxes, and more than likely know how to reduce your taxable income more than you do
- They save you the time and stress of filing your taxes yourself, and will likely handle a CRA audit if it comes your way
If you have a very simple tax return, such as a few T4s and maybe some RRSP contributions, this may not benefit you. A platform like Turbotax often guides you through the process of filing this basic of a tax return.
However, if you've entered the realm of pensions, taxable investment accounts, capital gains and/or losses, spousal RRSP contributions, taking care of dependents, or any other situation that goes beyond the "basics" in terms of tax filing, even though an expert may cost you a couple hundred dollars, they can end up saving you thousands.
Utilize your Tax-Free Savings Account
This one may seem obvious, but it is a mistake we see time and time again from Canadians. They're excited to get started in the stock market, so they open up a brokerage account and start buying companies. They've dipped their toes, but they've done so in the wrong pond so to speak.
The end result is likely to be a capital gain if they've purchased these stocks outside of a tax-sheltered account. The RRSP is a little more complex and is an account we'll go over later in this article. But, there is virtually no situation where it will be more beneficial to invest outside of your TFSA and in a taxable account.
Not only are dividends, interest, and other forms of distributions tax-free inside of this account, but so are capital gains and withdrawals. Unlike an RRSP, which is taxed upon withdrawal, the TFSA is, as long as you haven't been actively trading in the account, tax-free for life.
Want to know how to earn more than $750,000 and not pay the government a dime in taxes? Invest $6000 a year in your TFSA and earn 8% a year. It's that easy.
Utilize Registered Retirement Savings Plans
The RRSP can be a great way for higher-income earners to get a hefty tax return, but can also be a way for Canadians in any tax bracket to pay less money to the government.
Typically, the RRSP is more beneficial to higher-income earners. A generic example, if you're paying 30% tax now but will be paying 18% in retirement, a $10,000 contribution to your RRSP will get you $3000 back today, and you'll only need to pay $1800 upon withdrawal.
It becomes less effective for those in the lowest brackets now, as you'll receive the same amount today as you'll get back in retirement. However, it also does let you accrue tax free income while the money is inside of the RRSP.
Another situation the RRSP can help Canadians of any income level is to get out of owing money to the government. If you're finding you'll end up owing the CRA money over the year, you can offset this tax payable by making an RRSP contribution. Sure, you won't receive a refund, but at least you won't be paying the Canada Revenue Agency anything and you'll be able to earn investment returns tax free on the money you've contributed.
Make sure to file your capital losses
If you're lucky and financially secure enough to have already maximized the above two strategies via maxing out your RRSP and TFSA, you might find yourself with a taxable investment account. As a taxpayer, any activity inside this taxable account is subject to capital gains, and in the unfortunate situation, you make a poor decision, capital losses.
The most important thing from a tax perspective is that you're taking advantage of capital losses when possible. Because capital losses can be carried forward indefinitely, you can keep note of any potential losses you are able to claim on gains moving forward.
And, it's also important to understand that capital losses can be carried backwards for 3 years to offset capital gains. This is a concept many Canadians don't understand, and it can end up saving you a bunch on taxes if you've sold some winners in recent years.
Starting a business
This tax-saving tip is pretty unique. Businesses have somewhat of a different tax system. Personally, you are not allowed to deduct expenses that are accrued as a result of your job.
However, as a business, you are able to write off the majority of costs incurred to generate business revenue. For example, as a normal Canadian citizen, you cannot deduct the gasoline costs or vehicle payments required for you to get to work and back. However, as a contractor, considering the gasoline and vehicle help you generate business revenue, it can be deductible.
This tax-saving tip will primarily be useful for those who have a day job but are engaged in a side hustle of some kind. If most all of the money is withdrawn out of the business to pay you, there is little savings to be had. However, if you are able to keep the money inside of the business, taxes can be significantly lower.
This can allow you to store money generated from your business inside of the corporation, taxed at a much lower rate. In return, you avoid paying a much higher personal tax rate on that money immediately, and could potentially pull it out when your income is lower, paying less tax.
Incorporating is not cheap, however, often costing thousands of dollars. So, it's important you understand the total costs of doing so and see if the pros outweigh the cons.
Keep in mind, because income tax rates vary from province to province, I don't want to place any definitive numbers inside of this article. It's best to look up your current tax rates to figure out what works for you.
Loaning your spouse or family member money
This is a complex tax savings strategy, one that involves an official loan, a prescribed rate of interest, and some investments needed by your spouse or family member.
If you loan money to your spouse or family member and do not charge interest, or charge below the prescribed interest rate, any capital gains or interest on that loan will be taxable to you. If this wasn't the case, high-income earners could simply give all their wealth to their lower-income spouse or child in an attempt to pay less taxes on the earnings of that capital.
However, if you charge a minimum amount of interest, any income and capital gains earned on those funds will be taxable to the recipient.
First off, the prescribed rate of return is the minimum amount of interest needed to be charged on the loan. The Government of Canada sets this rate on a quarterly basis and once the loan is issued, it can stay the same over the duration. This means that if the prescribed interest rate increases a year after you lend your spouse money, you do not need to increase the rate of the loan.
There is a caveat here. The interest on the loan must be paid, and it must be paid within 30 days after the end of a calendar year. If not, this tax-saving strategy might fall apart.
This is far from a be all end all guide when it comes to family loans in terms of a tax-saving strategy. So, if you'd like more information on it and how you can take advantage, I strongly suggest you seek out a qualified accountant.
Organize your investment accounts
Another error many Canadians face when it comes to taxes is structuring their investment accounts the wrong way.
The most favorable form of taxable income is a capital gain. Following a capital gain would be a dividend paid by a Canadian corporation. And finally, the worst type of investment income would be interest income, as it is subject to full taxation.
With a capital gain, only 50% of the gain is taxable. With a dividend paid by a Canadian corporation, the dividend tax credit can reduce your tax burden significantly.
With that being said, I have always chosen to structure my investment accounts to tax shelter my dividends and place my stocks that do not pay a dividend in my taxable account. Why do I do this? deferral, of course.
When you receive a dividend, it is taxable in the year you receive it. But for a capital gain, it is not realized until you sell. You could potentially defer capital gains for as long as you really want. And, there is no way to reduce your overall dividend tax burden. With a capital gain, once realized, it can be offset with capital losses if you have them.
If you are holding fixed income securities, placing them in the right account is critical as well. There is no tax benefits to coupon payments made by fixed-income investments. They are simply taxed at 100% of your nominal Canadian income tax rate.
Place US dividend stocks inside of your RRSP
What many investors don't realize is that although the Tax Free Savings Account is tax free for dividends and capital gains accrued from Canadian investments inside of it, you can still be subject to foreign withholding tax on US dividends.
This is because the tax-treaty with the IRS and the CRA does not recognize the TFSA. So inside of this account, you will still have to pay a portion of your dividends received from US corporations to the IRS. With a W-8 form this can be reduced to 15%, but you could pay upwards of 30% in taxes.
How do we avoid this? Structure your investment accounts to place US stocks that pay a dividend inside of your RRSP. Not only will the capital gains be tax free, but also any dividends paid by the foreign corporation.
Claim your moving expenses (maybe)
If you're a full time student, a business owner, or simply someone who is moving for the purposes of being closer to work, you may be able to claim some of your moving expenses.
We won't get into exactly what you can claim, as that's an entirely different topic, but if you've moved at least 40 kilometers closer to your new place of work or business, it is likely you'll be able to deduct some of your moving expenses.
The 40-kilometer rule applies to a wide variety of situations, including moving within Canada, moving from a location outside of Canada to inside Canada, moving from inside Canada to a work location outside of Canada, and also moving between two locations outside of the country. As long as it is for the purposes of moving closer to your work or business, it is likely you have some potential tax deductions.
And, if you're a student who moved to take courses full time at a college, university, or other educational institution, you likely have some eligible deductions as well.
Everyone's situation is different in this regard. So, to help you out we will drop a useful link directly to the CRA website so that you can answer the questionnaire to see if you qualify to deduct moving expenses. Click here to view it.
The Canada training credit
If you are between the ages of 26 and 65, the Canada training credit is a great way to save some taxes if you have been taking an eligible training course.
Introduced in 2019, the Canada training credit was introduced to give Canadians some relief when it comes to paying for training courses. Every year you file a tax return, the CRA will review this return and then add $250 to your Canada Training Credit Limit (CTCL). Over the course of your lifetime, you can accrue up to $5000 worth of CTCL.
In order to claim the Canada training credit, you must have paid tuition or other fees to an eligible educational institution. Which, according to the CRA is a university, college, or other educational institution in Canada providing courses at a post-secondary level. Or, an institution that provides occupational skills courses.
Donating to charity is a popular way of saving some money when it comes to taxes. Yes, you are spending the money so it really isn't an overall "savings", but it's going to a good cause!
Donations can also be claimed up to five years prior, meaning if you donated money but haven't claimed it yet, you can still do so. And, if you're expecting to earn higher amounts of money in the future, you can also defer claiming that donation to save more money when your taxable income is higher.
If you're really looking for a tax friendly donation however, consider donating stocks. Not only are you allowed to bypass the capital gain from the stocks if you were to sell them, but your charitable donation will be the fair value of the stock.
Eligible medical expenses are claimable by you, or your spouse or common-law partner even if they didn't occur in Canada. This can also include things like medical care.
Instead of spending a ton of time highlighting what you can and cannot claim, we'll just direct you to the CRA's website, where they've created a table highlighting exactly what is an eligible expense and what isn't.
It even goes over whether or not you need a valid prescription and certification needed in writing. Click here to read the list.
Overall, there are many other ways to figure out how to pay less taxes in Canada, but these are some key ones
Reducing your tax burden is absolutely critical when it comes to growing your wealth. Making simple mistakes on your income taxes, the optimization of your investment accounts, or the inopportune sales of capital property can just end up in more of your hard earned money being in the governments hands.
These 12 tax saving strategies above are far from the be all end all when it comes to tax savings. But, they are 12 strategies that many Canadians can use to put more money back into their pockets.