Ten Year-Round Tax-Saving Strategies for Canadians
Here are some quick and easy strategies to help you save on your tax bill in Canada. If you’re employing all these tactics, you get an A+ for having your taxes managed all year long!
Open a TFSA
The (now not so) new tax-free savings account (TFSA), launched in 2009, is the ideal place to put up to $5,000 of savings (per year!) and earn tax-free income and/or gains for life. Withdrawals aren’t taxed, don’t negatively affect your eligibility for government-tested benefits, and can be re-contributed the following calendar year.
Maximize your RRSP contributions
Take advantage of one of the last great tax shelters. An RRSP (Registered Retirement Savings Plan) is an arrangement that allows you to save for your retirement on a tax-friendly basis. Funds you contribute are not taxed until you withdraw them. The maximum contribution you can make for 2012 is 18 percent of your earned income up to a maximum of $22,970, and this amount will be indexed annually.
Set up a spousal RRSP
The primary benefit of a spousal RRSP is that funds withdrawn can generally be taxed in the hands of a lower-income spouse.
Think about opening an RDSP for a disabled person
If you or someone you care about has a disability, consider opening up a registered disability savings plan (RDSP). Contributions to RDSPs, limited to $200,000 over the disabled beneficiary’s lifetime, may be augmented by up to $90,000 in Canada Disability Savings grants and bonds.
Earn tax-efficient investment income
If you’ve maxed out your TFSA (Tax Free Savings Account) and RRSP contributions, consider tax-efficient investment income outside these tax-sheltered plans by investing in Canadian dividend-paying stocks, for dividends that qualify for the dividend tax credit, and for capital gains, which are only half taxable.
Open up RESPs for your kids
Children are definitely an investment! Don’t forget to make at least $2,500 of contributions to each child’s registered education savings plan (RESP) this year to take advantage of the $500 Canada Education Savings Grant. You may also be able to catch up on missed CESGs from prior years.
Explore pension splitting
If you’ve received pension income in the year, be sure to investigate whether splitting up to half that income with your spouse or partner makes sense when you file your tax return.
Consider income splitting
A spousal income-splitting strategy, where the higher-income spouse or partner loans funds to the lower-income spouse or partner to invest, may be ideal given the record low prescribed interest rate, which is currently set at 1 percent (and will remain at 1 percent until at least December 31, 2012).
Donate in kind to charity
When planning your charitable giving for the year, consider donating appreciated securities directly to your charity of choice. You get a tax receipt for the full value of the securities that you donated and pay no tax on any accrued capital gains.
Plan now to avoid a tax refund
If you regularly get a large tax refund each spring — say, because you’re eligible for the child tax credit — consider applying for a reduction of tax at source using CRA form T1213. (You’ll need to complete the form each year.)