Tax season 2021 is fast approaching and it’s time to prepare your documents for review by the CRA. Unfortunately, no one really likes to pay taxes but it’s a necessary part of our country’s economy. The biggest problem is that paying your income taxes can often be expensive and complicated, especially if you’re not organized before you file them.
Then again, what if you could lower your income tax bill this year? Luckily, while filing your income taxes can still be a chore, there may be a few things you can do to save a bit of money.
Deposit Your Money in 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 easier or finance certain large expenses.
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, so you will eventually have to pay taxes when you withdraw funds from your account.
- 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 in a TFSA
Similar to the way an RRSP works, the funds you deposit into a Tax-Free Savings Account (TFSA) will gradually generate interest. However, one of the biggest differences between these two accounts is that 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 and none of your account’s interest earnings, capital gains or dividends will be taxed.
- For the 2020 tax year, the TFSA contribution limit is $6,000.
Write Off 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. When qualifiable, capital losses can be used to 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, those losses can be carried back to and deducted 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.
Claim as Many Expenses as You Can
To save even more money on your income taxes, there are a number of personal costs that you can claim when filing your return, including but not restricted to:
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 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:
- Storage Fees
- Realtor Commissions
- Utilities (Connection or Disconnection)
- Travel Costs (to View or Buy Properties)
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 2020, medical costs that total less than $2,397 ($2,421 for 2021) or 3 % of your line 23600 income are eligible. Examples:
- Dental Procedures
- Nursing Home Costs
- Medical Tools, Clothing & Equipment
- Medical Treatments (physiotherapy, cosmetic surgery, etc.)
“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 2020 tax year, the first $12,069 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 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.
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.
Check out this infographic to learn about the different tax deadlines.
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.
Don’t Miss Out on Tax Season 2021
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.
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