Top Tax Reduction Tips for Canadians
Just about every Canadian wants to pay less in taxes. This article spells out the best ways to reduce what you owe the Canada Revenue Agency (CRA), from Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) contributions to pension income splitting. Follow these four tips and you will lower your taxes!
Save in tax-efficient accounts.
When you have extra cash to invest, make sure you invest it in a way that allows you to pay the least amount of tax possible. When you are working, that means contributing to your RRSP every year since you get a tax deduction for the contribution made. In addition, all investment income earned is free from tax. You don’t pay tax until withdrawals are made. And everyone in Canada over the age of 18 should set up a TFSA to their maximum ability. Why? You pay no tax on investment earnings and all withdrawals are tax free. Why pay tax on investment earnings if you don’t have to?
Income split for family tax savings.
There are many ways to share your tax burden with others in your family. For seniors receiving pension or Registered Retirement Income Fund (RRIF) payments, pension income splitting between spouses means you can now cut your tax bill and potentially reduce the impact of the Old Age Security (OAS) clawback! You can also share your Canada Pension Plan (CPP) benefits for more tax savings. For those with investment assets, and family members taxed at lower rates there are many strategies such as a prescribed rate loan that can help share the tax burden. The key is to know when income splitting is legally possible.
File your tax return on time.
While filing your return on time won’t technically reduce your tax liability, it will help you avoid costly penalties and interest. If you don’t file on time, and you owe money, penalties are charged. In addition, if you don’t ante up on your tax bill, the interest payments can be huge. You might be better off taking out a bank loan to pay the tax if you can secure a lower rate than the CRA will charge you. File and pay by April 30 to avoid these costs.
Take advantage of tax-free perks at work.
Employees often think there is nothing they can do to reduce their tax burden; however, there may be many perks offered at work that you can take advantage of and not pay any additional tax. Some items to ask for include RRSP or pension contributions paid by your employer, employment related moving costs, personal counselling, up to $10,000 of death benefits, education costs, in-house fitness facilities, in house daycare services and merchandise discounts, among others.