17 WAYS TO REDUCE TAX DEBT IN CANADABy Caitlin in Money
If you are looking for ways to reduce your tax debt in Canada, here are a few places you can start. Some you may have thought of, while others are more remote. Consider other ways you can cut down on your tax debt. Sometimes it is just a simple action that leads to a big result.
Here they are:
1. Automatic RRSP contributions: By setting up an automatic plan throughout the year to contribute to your RRSP, you can boost your retirement plan to almost $140,000 after 35 years, based on an annual investment return of 6%. If you invest in yearly $1200 lump sums, the amount is significantly reduced. So always do this automatically on a monthly basis.
2. To avoid the taxation of the RRSP fees, pay this from the “inside.” Annual administration fees which are paid from assets from inside the plan are not taxable.
3. Set up a spousal RRSP. This allows you to split future retirement income with your spouse. This is especially beneficial if your spouse is in a lower tax bracket than you. When the money is taken out, if it is in the name of your spouse, you will be assessed lower tax amounts than if it had remained in your own account.
4. Invest in an RRSP (Registered Retirement Savings Plan). This is one of the best tax deferrals available today to Canadians. You may choose RRSP investments which generate additional income such as GICs (Guaranteed Investment Certificates), money market funds, or other investments.
5. Rethink the way you think about tax refunds. This is a difficult one for many Canadians. You want to get a tax refund, to help with a lump sum while you are stretching through each year. But if you think of a tax refund as money you should have received throughout the year, you start to view things differently. Instead of opting to make sure you get a refund, think of a way to adjust your T1213 form to get the money due you each month as you go, rather than one lump sum at the end of the year. Then, once you have that regular extra money coming each month, consider investing it into an RRSP contribution or other tax-deferred plan each year.
6. Keep purchases to a minimum. We often focus on the income tax ritual each year, and forget about the daily taxation we experience each day when we purchase something. By spending less money day in and day out, you defer the most obvious taxes -sales tax and save more money in the end.
7. Invest in the future. Contribute to the RESP (Registered Education Savings Plan) for school-aged children. This investment will grow tax-free for up to 25 years or until withdrawn for educational use. This is a great way to reduce your overall tax debt and it all goes to the future of your child’s education. Tip: If you make a contribution of up to $2000 per year to a child under 19, you can qualify for an education savings grant of 20% of your contribution for a maximum of $400 per year per child!
8. If you are self-employed, and you pay your kids for helping with your business, you can deduct their salary from your income tax amount. If you have a home office, you may be able to claim additional tax breaks due to the use of your house.
9. Apply for the Canadian Child Tax Benefit. This is a credit which you may qualify for if you make less than $31,178 per year. If you do, you can receive up to $1283 per tax year to help with extra expenses or whatever you want to use it for.
10. Use moving expenses as a tax deduction. If you have relocated over 40km from your home area to start a new job or a business, you can deduct most of the moving costs. You can access a list of moving costs online by seaching for Canadian tax deductions involving moving expenses.
11. Deduct car expenses. You may qualify for deductions including: lease expenses, car repairs, insurance costs, and more.
12. Don’t forget to add up all medical expenses. The Canadian tax laws allow you to deduct any medical expenses which are in excess of 3% of your net income, or 15% of total expenses. Some people forget that health care premiums you are paying at work count also.
13. Take the child disability credit if you qualify. The way you know you will qualify for this is if you have a child with a severe, long-term physical or mental disability, then you will likely be eligible.
14. Take tax credits for back-to-school expenses for your children. Anything from books for school, extra supplies and materials, and any required expenses may be eligible for a deduction. If your child is in a qualified Children’s Fitness program, you may qualify for other benefits as well.
15. For couples, you can take advantage of such tax relief packages as the Pension Income Credit, the Old Age Security pension, and other federal programs designed to save you money as a couple. Also, don’t take your CPP/QPP (pension payment) until you absolutely need it. The older you are when you withdraw this, the better off you will be due to the laws on collecting at certain ages.
16. Buy life insurance plans to cover each other in the event of your death. This is something simple that most people do, but many do not see it as related to tax debt. But remember, once your spouse dies, you will no longer have their income to supplement your own. Having a significant amount of life insurance takes care of this debt once and for all and in one lump sum.
17. Gift property during your lifetime, as well as at the time of your death. During your estate planning, plan a way to give over some of your wealth a little at a time, rather than all at once. This will reduce the amount of taxes you will owe to the government each year on estate tax, while providing a way to gradually hand over the wealth to the next generation.
These are just a few ways you can save on your overall tax debt while planning for future estate assets to give to your children. There are many other things you can do to decrease your tax burden. With the use of these sound tips and a few others, you can save a significant amount of money from now on and dread the tax season just a bit less, knowing you are putting your money to the best use possible.