5 Effective Tax Minimization Strategies for Canadians
Many Canadians are paying more tax than they should.
Reducing your tax obligations helps you save for your retirement - or something special you want in the meantime. There are plenty of legal ways to reduce the amount of tax you pay - and you don’t have to be part of the top 1% to access the benefits!
How can I reduce my taxes?
The most accessible way for Canadians to reduce your taxes is to reduce your taxable income.
Your taxable income is the amount of income that will be used to calculate your federal tax obligation. It is equal to the taxable income you earn, minus any deductions and exemptions.
Common types of taxable income
Some of the most common types of taxable income include:
- Rent paid to you
- Wages and/or the salary you receive from work
- Capital gains
- Self-employment income
- Interest you receive on your savings accounts
Here’s the CRA’s list “All types of income”. It outlines the types of income and which of those are taxable.
What is tax minimization?
Tax minimization means claiming all the deductions, exemptions and offsets you’re entitled to. It means paying exactly the amount of tax you should be paying. No more, no less.
Is tax minimization legal?
Minimizing your tax isn’t the same as tax avoidance. You’re taking advantage of the legal mechanisms that your Government has outlined to reduce your tax payable.
5 ways you can reduce your taxable income
Here are some mechanisms you can use to reduce your taxable income:
Tax-Free Savings Accounts
The interest you earn on savings in a TFSA isn’t taxable. So, you can reduce the amount of tax you need to pay by keeping your savings in a TFSA. You can withdraw the money tax-free whenever you need it too.
The tax savings from this will be small - but every bit counts!
Registered Retirement Savings Plans
The amount you contribute to your RRSP can be used to reduce your taxable income (to the limit prescribed by the CRA). These plans also allow you to defer the tax you need to pay until the money is paid out of the RRSP. What this does is lets you pay tax on a lower tax bracket - since you won’t be ‘earning’ as much once you’ve retired.
Incorporating Your Small Business
If your small business is making enough money, you might benefit from incorporating your business. You’ll pay tax on the income earned by your business at the corporate rate, instead of your personal rate - so it might be lower. It also allows you to access benefits like limited liability, small business deductions, and capital gains exemptions.
If you ‘gift’ money or investments to your common-law partner, spouse, or child, you might be deemed to be ‘income splitting’. This means that the gifted amount will be taxed at the tax rate of the giftee.
This is sometimes a useful tactic where one member of the household is earning in a higher tax bracket than the other.
Claiming all Your Deductions
You might be entitled to deductions you don’t know about. Having a tax professional take a look at your tax return before it’s submitted will help you claim everything you can - which reduces your total taxable income.
Who needs to minimize tax?
Anyone can benefit from minimizing their tax obligations. For you, that might mean freeing up some money for a holiday this year - or investing today for your retirement.
Let's Minimize Your Tax
The qualified tax professionals at HT & Associates can help you minimize the amount of tax you pay.
Your first consultation with us is completely free. Plus, we're happy to meet with you in our office, your office, or online - whatever suits you best.