People are always looking for ways to save tax in Canada. Well, we have 7 of the best ways that you can legally save money on taxes this year.
Just like knowing how to check your credit score and what an interest rate means for a loan, Canadians need to have these tax-savings tips in their financial toolbox.
Just remember that paying fewer taxes legally does not mean avoiding paying any taxes. That will get you into tax debt and the Canadian government has ways of collecting your outstanding tax debt including garnishing your wages.
Here are some of the best ways to save more money in taxes in Canada this year.
Save Money On Taxes With Contributions or Gifts to Charities
Did you know that registered charities in Canada give out tax receipts for donations? Those receipts help reduce your tax bill.
You don’t necessarily have to donate money. You can donate items or your time. In certain circumstances, you get a receipt for the fair market value of the items or service.
The important thing to remember is to establish the fair market value of the goods or service. For example, if you donate food to a charity luncheon, if the charity can prove the fair market value of the food, they can issue a receipt for it.
So, if you are donating food to a charity, keep your grocery bill.
According to the CRA, if you sing at a charity event, make sure to get paid. If the charity pays you $100, the next step is donate a cheque for $100. The charity then issues you a charitable donation receipt for $100. That comes off your taxes.
It is always a good idea to ask beforehand if you can get a receipt for your donation or gift.
The Right To Reimbursement
A Right to Reimbursement is another way a charity can issue a receipt for a volounteer’s out-of-pocket expenses. If the volounteer doesn’t want reimbursement but instead wants a tax receipt, then the volounteer needs to put that in writing.
This way, the service becomes a non-cash gift. You can get a receipt for the gas used when you use your car for the charity. Again, this needs to be agreed on beforehand with the charity.
Save Money With A Tax-Deferred Deposit Into an RRSP
The first thing you can try is to invest money in a tax-advantaged account, such as a Registered Retirement Savings Plan (RRSP). That’s because the money you deposit into an RRSP is tax-sheltered.
So, not only will you save money on your taxes, you can eventually use your RRSP to retire or to finance certain large purchases.
Things to Know About Your RRSP
- Investing in an RRSP doesn’t mean that you’ll go forever without paying taxes on your savings. The money in your RRSP is actually tax-deferred. You will eventually have to pay taxes when you withdraw funds from your account. The good news is that when you do pay taxes, it is because you are retired and your tax bracket is much lower than today.
- RRSPs have a maximum yearly contribution limit that varies based on your income. Plus, unlike a normal bank account, you can only withdraw funds at specific times, such as retiring at age 71, paying for someone’s education or purchasing a real estate property with the RRSP Home Buyers Plan.
- Regularly contributing to an RRSP can reduce your annual income tax bill and put you in a lower tax bracket when you retire, which will help you save more money during tax season from that point on. Just make sure not to go over your contribution limit or try to withdraw early (which can lead to various penalties).
- If you’re married and max out your own contribution limit, you can continue avoiding penalties and paying fewer taxes by depositing money into your spouse’s RRSP account. When you retire, this will allow you to split your lower-income with your spouse’s and also move both of you into a lower tax bracket.
Invest Money With A TFSA
Similarly,, the funds you deposit into a Tax-Free Savings Account (TFSA) earn tax-free interest. However, a better way to use the TFSA is to use the TFSA money for investing.
When your investments are part of your TFSA, the profits you might earn are also tax sheltered. You can save more money.
Unlike an RRSP, you’re allowed to withdraw from your TFSA whenever you want and the funds will always be tax-free, not just tax-deferred.
What to Know About Your TFSA
- Like an RRSP, there is a yearly limit for how much you can deposit into a TFSA, which is set by the Government of Canada.
- You don’t have to be making a specific income to contribute to a TFSA. Plus, none of your account’s interest earnings, capital gains or dividends are taxable.
- Starting in 2023, the annual TFSA contribution limit is $6,500.
File your taxes with TurboTax
Get StartedIf You Run A Business, Write Off Any Losses
If you run a business, you may be able to write off certain types of capital losses on your taxes. Common examples of losses that are tax-deductible include unpaid customer invoices, thefts and investments that have lost value. Eligible capital losses can amend past bills or offset your yearly capital gains.
Things to Know About Writing Off Losses
- If your business experiences capital losses that outweigh its capital gains, you can can deduct the loss from the previous 3 taxation years.
- Writing off capital losses isn’t just for business owners. You can also deduct the losses that you’ve had on your assets, such as a home or other investment.
- Some investors buy low-performing assets and investments specifically to offset their capital gains, which in turn allows them to avoid paying the capital gains tax.
Saving Money On Taxes By Claiming Personal Expenses
To save even more money on your income taxes, there are a number of personal costs that you can claim including:
Home Office Expenses
If you have run a home business, you have to calculate a percentage of your workspace expenses then report those costs to the CRA so that they can be claimed on your taxes. Here are some home business expenses that Canadians commonly deduct:
- Computers, Laptops & Other Equipment
- Internet & Phone Bills
- Utility Costs
- Mortgage Interest or Rent Payments
- Office Furniture & Supplies
- Property Taxes & Home Insurance
Moving Costs
Moving is rarely easy or cheap but thankfully you may be able to claim some of your expenses on your taxes if you had to travel at least 40 kilometres to reach a new home-based workplace during the previous year. Deductible moving expenses include:
- Transportation
- Storage Fees
- Realtor Commissions
- Utilities (Connection or Disconnection)
- Travel Costs (to View or Buy Properties)
Medical Expenses
If you, your spouse or your common-law partner have healthcare costs that qualify for non-refundable tax credits during the current year, they can be claimed on your taxes. The same goes for children or other dependents. For 2022, medical costs that total less than $2,479 for 2022 or 3 % of your line 23600 income are eligible. Examples:
- Prescriptions
- Dental Procedures
- Nursing Home Costs
- Medical Tools, Clothing & Equipment
- Medical Treatments (physiotherapy, cosmetic surgery, etc.)
Save Money on Taxes in Canada When You Hire Your Spouse, Common-Law Partner, or Child
Another way to pay less tax in Canada is by transferring a portion of your income to one of your primary family members. Many self-employed people will do this by hiring their spouse, common-law partner, or child as an employee of their home business. Typically, this would need to be someone who’s already earning a lower income than yourself.
Additionally, you may be able to transfer some types of taxable gains and dividend income to the lower-earning taxpayer, which can further decrease your own taxable income and even get you moved to a lower tax bracket.
Things to Know About Hiring a Lower-Earning Family Member
- For the 2022 tax year, the first $14,398 of your family member’s employment income is tax-free. Plus, their salary will qualify as a tax deduction for your business, which you can add to your other deductible expenses.
- The taxpayer’s eligibility and deductible amounts may vary based on their age. For instance, if your child is under 18, you could transfer around $12,000 to them, then claim it as a business expense, thus making the income tax-free.
Check out how to file your taxes as a couple.
Pay Less Tax Related Interest by Avoiding Late Penalties
There’s no denying the importance of paying your income taxes on time. If you don’t, you could receive a stiff late penalty from the CRA, as well as more interest added to your final tax debt.
Although taxpayers who earn a regular income have until April 30 to file their taxes without penalty, self-employed individuals have until June 15.
Note: if any of the due dates fall on a weekend or holiday, CRA will push the date to the next business day.
You Should Always Try to Pay Your Taxes On Time Because…
- If you file your taxes anytime past your original deadline, the CRA will normally charge you a late penalty equal to 5% of your total tax debt.
- The longer you go without paying your taxes, the more interest your account will generate. Today’s rate is 1% interest per month that passes after your deadline.
Hire a Tax Expert
Paying taxes is often more complicated than it looks, so it may be easier to hire an accountant to manage the whole ordeal for you. While professional tax services can be pricey, they may save you stress during tax season. Plus, they may discover that you’re eligible for more tax deductions and credits than you would have realized on your own.
Before You Hire a Tax Expert, Make Sure To…
- Do Research – There are plenty of solid tax management businesses in Canada. Depending on your income and what you’re claiming, the average accountant’s rate is about $100 – $200 per filing. Some tax experts charge even lower rates if you file your taxes early or don’t have too much paperwork to sift through.
- Save Your Receipts & Tax Paperwork – For an accountant to get the most out of your tax return, they must have all the right documents, including any invoices, receipts, T4 slips and tax paperwork from the previous year. This is particularly important if you want to claim home workplace, moving or medical expenses.
- Weigh Your Options – If you can’t afford a tax expert, there are many tax software, like TurboTax, that are just as good as the real thing. Not only can this help you save money over time, but it can also teach you how to file your own taxes and give you information about any credits or deductions that you’re not aware of.
The Best Way To Save Money On Taxes in Canada Is Do Your Tax Homework
Filing your taxes can be expensive and annoying but there are ways to make it better. Plus, the credits and deductions you’re eligible for can vary depending on your income, assets, expenses and employment. Don’t forget to save your receipts, prepare all your paperwork, consult the CRA website and do all you can to pay fewer taxes this year.
