HOW TO LEGALLY REDUCE YOUR TAXABLE INCOME IN CANADA

As a Canadian taxpayer, minimizing your taxable income can help reduce your tax liability and increase your take-home pay. While tax evasion is illegal and unethical, there are several legitimate ways to reduce your taxable income in Canada. In this article, we’ll explore the top strategies for reducing your taxable income, while ensuring compliance with Canadian tax laws.

What is Taxable Income?

Taxable income is the portion of an individual’s income that is subject to income tax. It includes various types of income, such as employment income, self-employment income, investment income, and other sources of income. Your taxable income is also your income after various deductions, credits, and exemptions have been applied.

Understanding Taxable Income

Before we dive into the strategies for reducing taxable income, it’s essential to understand what taxable income is. Taxable income refers to the portion of your income that is subject to income tax. This includes employment income, self-employment income, investment income, and other sources of income.

1. Maximize Your RRSP Contributions

Registered Retirement Savings Plans (RRSPs) are a popular way to save for retirement while reducing taxable income. Contributions to RRSPs are tax-deductible, which means they reduce your taxable income. The funds in your RRSP grow tax-free until withdrawal, at which point they are taxed as income.

2. Take Advantage of Tax Credits

Tax credits are non-refundable credits that reduce your tax liability. Some common tax credits in Canada include:

• Basic Personal Amount (BPA)
• Spousal Credit
• Child Fitness Tax Credit
• Home Accessibility Tax Credit
• Medical Expense Tax Credit

3. Claim Deductions and Expenses

Deductions and expenses can reduce your taxable income. Some common deductions and expenses include:

• Moving expenses
• Child care expenses
• Medical expenses
• Home office expenses (for self-employed individuals)
• Business expenses (for self-employed individuals)

4. Apply for Low-Income Tax Credits

You can reduce the amount of taxes you owe by taking advantage of deductions and credits; these can be used to decrease the amount of income subject to tax.

You may be eligible for certain income-based tax credits, such as the Canada Workers Benefit (CWB), previously known as the Working Income Tax Benefit (WITB). These credits are designed to help low and middle-income families reduce the burden of taxes by providing credits.

5. Utilize the Tax-Free Savings Account (TFSA)

The Tax-Free Savings Account (TFSA) is a registered savings account that allows you to earn investment income tax-free. Contributions to a TFSA are made with after-tax dollars, but the funds grow tax-free and withdrawals are tax-free.

Contributions to a TFSA are also not deductible from your taxable income, but any money earned in the account (including interest and capital gains) is tax-free when withdrawn.

This means you won’t have to pay tax on any of the money you withdraw from the account. Furthermore, any unused contribution room can be carried forward and used in future years.

It’s worth noting that TFSAs have an annual contribution limit which varies by year, so it’s essential to keep track of your contributions to ensure you don’t exceed the limit.

6. Consider Incorporating Your Business

If you’re a self-employed individual or small business owner, incorporating your business can provide tax benefits. Incorporation can help reduce your tax liability by allowing you to split income with family members and take advantage of the small business deduction.

7. Contribute the maximum to your FHSA

Thinking of buying your first home? The new First Home Savings Account (FHSA) can help reduce your taxable income.

The FHSA offers the same tax advantages as an RRSP: contributions reduce your taxable income, and investment returns are tax-sheltered. Plus, amounts withdrawn from your FHSA to purchase a first home are tax-free.

8. Donate to Charity

Donating to charity can provide a tax benefit in the form of a charitable donation tax credit. This credit can help reduce your tax liability and provide a sense of social responsibility.

As long as you’re donating to a registered charity, you are eligible for non-refundable tax credits for up to 33% of the donated amount. Depending on the province of residence, you can be eligible for additional credits on top of the federal credit.

You can claim up to 75% of your net income in donations each year, and donations can be carried forward for up to five years.

You can also donate investments (such as stocks and bonds) to a registered charity. Not only will this result in a tax credit, but it can potentially eliminate the capital gains tax on eligible securities.

A charitable contribution is a great way to reduce taxes and support a cause you feel passionate about. It’s a win-win situation.

9. Consider a Registered Education Savings Plan (RESP)

A Registered Education Savings Plan (RESP) is a savings plan designed to help parents save for their children’s education. Contributions to an RESP are eligible for a government grant, and the funds grow tax-free until withdrawal.

The tax-deductible contribution is capped at around 18% of your previous year’s earned income, up to a maximum amount that changes yearly.

Even better, the Canada Education Savings Grant (CESG) will also match 20% of the first $2,500 you contribute to an RESP each year. This means the government will grant you up to $500 tax-free for each child enrolled in an RESP towards their education.

10. Take Advantage of the Home Buyers’ Plan (HBP)

The Home Buyers’ Plan  (HBP) is a program that allows first-time homebuyers to withdraw up to $35,000 from their RRSP to purchase or build a home. The withdrawn funds must be repaid within 15 years.

11. Make a Medical Expense Tax Credit Claim

The Medical Expense Tax Credit   (METC) is a non-refundable tax credit that can help reduce the income tax you must pay.

This credit covers eligible medical expenses paid by an individual, their spouse, or common-law partner for themselves, their dependents, or specific individuals, such as your or your spouse’s or common-law partner’s children who were under 18 years of age at the end of the tax year.

Eligible expenses include things like prescription medications, orthopedic shoes and devices, medical aids (such as a wheelchair), and specific amounts paid for long-term care.

12. Consult a Tax Professional

Tax laws and regulations can be complex and subject to change. Consulting a tax professional can help ensure you’re taking advantage of all the tax savings available to you. A tax professional can provide personalized advice and help you navigate the tax system.

Conclusion

Reducing your taxable income in Canada requires a combination of tax planning, financial discipline, and knowledge of tax laws and regulations. By implementing the strategies outlined in this article, you can minimize your tax liability and maximize your take-home pay. Remember to always consult a tax professional  to ensure you’re in compliance with Canadian tax laws.

Frequently Asked Questions

Q: What is the deadline for filing taxes in Canada?

A: The deadline for filing taxes in Canada is April 30^th of each year.

Q: Can I claim my spouse’s medical expenses on my tax return?

A: Yes, you can claim your spouse’s medical expenses on your tax return, as long as you have not already claimed them on your spouse’s tax return.

Q: How much can I contribute to my RRSP each year?

A: The amount you can contribute to your RRSP each year is based on your earned income and pension adjustments. You can find your RRSP contribution limit on your Notice of Assessment from the Canada Revenue Agency.

Q: Can I claim home office expenses on my tax return?

A: Yes, you can claim home office expenses on your tax return, as long as you are self-employed or have a home office that is used regularly for business purposes.

About Author

Shanel John  is a dedicated Certified Public Accountant (CPA) at G.L.H. Accounting, specializing in Income Tax with over 10 years of experience. Based in Brampton, Ontario, Canada, Shanel offers expertise in tax preparation, financial accounting, and advisory services. A certified QBO Pro Advisor, Shanel’s decade-long experience and knowledge make her a trusted figure in the accounting field.