Each year hard-working, honest Canadians must navigate the neverending changes to personal tax filing. In this month’s blog, we present some simple strategies that can help income earners limit their tax exposure.
Next time you’re making a large purchase, consider using cash or taking out your savings and borrowing to invest. Carrying debt is a reality for many Canadians but unlike consumer debt, the interest paid on loans taken out and leveraged for investment purposes is tax-deductible. Using cash to pay for purchases can also save hundreds in financing fees and interest paid.
The allocation of your investments into different asset classes can significantly impact your tax bill. Investments in stocks receive preferential tax breaks on dividends and capital gains but fixed-income investments do not.
Using and maximizing contributions into a Tax Free Savings Account (TFSA) each year is another simple way to use after-tax income for investing with the benefit of avoiding taxes on income earned in the account. The contribution limit for a TFSA in 2022 is $6,000 which represents a maximum lifetime contribution limit of $81,500.
Contributions into Registered Retirement Savings Plans (RRSP) reduce your taxable income now and can result in significant credits in the contribution year. Don’t forget to reinvest your tax credit from RRSPs back into the plan as taxes are deferred to when the RRSP is withdrawn, ideally in retirement when your personal income and tax rate are lower.
Spousal Income Splitting
Married couples with significant income differences can still benefit from some income-splitting tax reduction techniques. The higher earner can reduce their personal tax bill by contributing after-tax income to their spouse’s RRSP or by splitting their income with their lower-earning spouse.
Owning a small business or working as a self-employed individual may allow you to claim deductions for costs incurred to do business and earn an income. These could include office expenses, salaries paid, input supplies and vehicle expenses.
We recommend speaking with your accountant before starting a business to ensure tax planning is included as part of your business plan. A certified, trusted accountant can also talk you through all individual tax planning options and review your overall financial plan to make personalized tax recommendations.
If you’re looking for a qualified, responsive accountant who is knowledgeable on the current taxation rules and available deductions, look no further than McNabb Lucuk LLP.