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How to Save Tax in Canada?

June 2, 2017
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Our experts are sharing their advice on how to save your tax bill in Canada, you can apply this advice while using our Canadian tax calculator.

As each individual has a different tax situation than the next, the chatter may be stressful, confusing, and worrying. As it is too late to change the outcome of last year’s taxes, these tips may open your eyes to some overlooked deductions or credits when filing, or spark your interest in planning for next year.

The Canadian tax system contains graduated rates both federally and provincially. A common misconception is that a raise or bonus will push you into the next tax bracket, and you’ll make less money. This is not true. Picture buckets of loonies on a table, each bucket represents a tax bracket, and loonies can only go into the next bucket when the previous one is full.

At tax time the Canada Revenue agency wants you to submit a percentage of each bucket, based on the different tax brackets, with the first bucket having a low percentage, and each additional bucket a higher percentage. If your raise pushes you into the next tax bracket, you have contributed the maximum to your highest percentage bucket, and now have loonies to contribute to the next bucket. Those loonies are taxed at a higher rate, but all of the loonies before the raise remain in the same situation.

Now onto the tax savings. Let’s picture another bucket, the tax free bucket, on the table and loonies can be transferred out of the other buckets and into the tax free bucket. The great thing about this bucket is CRA will not take a portion of the loonies in the tax free bucket. This is how tax deductions work. Any amount of your income that was spent on allowable tax deductions will come out of the bucket with the highest tax percentage, and into the tax free bucket. This is where the greatest amount of tax savings will happen.

 

There are many tax deductions which result in tax savings, here are the most common;

RRSP– A registered retirement savings account is a type of bank account which allows you to defer your income to a later date. You can move the income from your highest tax bucket into your tax free bucket, but one day you’ll have to move it back to your highest applicable tax bucket. The goal is that your highest tax bucket when the money is moved back, is lower than your highest tax bucket today.

Employment Expenses– Many times your work will require you to have personal equipment for work purposes. Whether it is steel toe boots, or internet for a home office, there are many expenses that can be moved to your tax free bucket. You are required to have your employer sign an authorization form that CRA may ask for, but if the employer requires this they should have no problem signing it.

Carrying Charges and Interest– Many people these days are opening online investment accounts to purchase investments they are interested in. If you borrow money for these investments any interest incurred for the year is tax deductible. For more traditional investors using a broker, the management fee paid to them is also tax deductible.

Finally let’s picture a few mason jars on the table, one for tuition and education, one for public transportation, one for medical expenses. Now for every dollar you have spent that relates to one of the labels on the jar, we’ll place a marble in that jar. At the end of the year we’ll add up the marbles in each jar and take a percentage of the marbles to go against your taxes payable both federally and provincially. This is how tax credits work.

Tax credits are more common than tax deductions, however the impact on your tax is less, here are the most common credits;

Public Transit Passes Amount– If you purchase a public transit pass to get around, either due to not having a vehicle, hating traffic, or not wanting to pay high parking prices the amount you paid counts towards your tax credits, and not only isn’t it cheaper and sometimes faster, it also reduces your tax bill.

Interest on Student Loans– As we all know post-secondary education isn’t cheap. People can take years to pay this off, however the interest is normally fair, and it is a tax credit. What I’m saying is if you come into some money and your thinking about paying down your credit card, line of credit or student loan, leave the student loan and pay down the others.

As each person’s tax situation is unique these common deductions and credits may not be applicable. Understanding how the tax system works, and the difference between deductions and credits will hopefully raise your interest and point you in the right direction for savings.

For business owners that have corporations the tax system is more complex. How do I take the money out of the company that I put into the company at the beginning? Should I be paying myself with dividends or salary? Do I have to withhold CPP and EI from myself? There are many different answers to these questions depending on your individual situation. If you have questions such as these a CPA can help get you through them.

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