Five moves to help lower your tax bill this year

Canadians typically spend about a third of their income on personal income taxes. While paying tax is an unavoidable responsibility, it’s smart to optimize your taxes so you don’t overpay. Here are some of our best tips!

Open or contribute to an RRSP

Registered Retirement Savings Plans are one of the most frequently utilized strategies for lowering taxable income. It is recommended that you push as much income as possible into your RRSP to reduce your taxable income. Taxpayers can put eighteen percent of their earned income into an RRSP, to a maximum of $27,830 in 2021. If you haven’t been contributing to an RRSP, or if you haven’t been contributing your maximum amount, there’s good news: catch up contributions are allowed! That means that you could benefit from large deductions from your income when you are able to contribute more substantially. Once you’ve contributed, you’ll have a myriad of options on how to invest the funds – stocks, mutual funds, bonds, even bitcoin, although proceed carefully with any cryptocurrency investments.

Open or contribute to a TFSA 

Utilizing a Tax-Free Savings Account (TFSA) is another great tax optimization strategy.  While the money that goes in to a TFSA is after-tax, any growth on the contributions is tax-free. Starting in 2009, eligible Canadians 18 years and older have been allowed to contribute to this fund. The current year allowance is $6,000 and, if you were eligible in all those previous years and have yet to contribute, you can put in a whopping $75,500! You’ll have most of the same investment vehicle options that you have for your RRSP account, so you can be as aggressive or conservative as you like with these funds. An 8% return on a $75,500 balance could yield you over $6,000 a year in tax free returns!

Calibrate and optimize your taxable (non-retirement) portfolios 

Eligible Canadian dividends and capital gains are treated preferentially from a tax perspective, so try to shift your ownership of those types of gains to your taxable brokerage account. Put investments with a higher tax burden into retirement or tax-advantaged accounts (see above).

 "... the higher earning spouse could contribute to the lower earning spouse's RRSP."

Split income if married (or common law partners) 

If the earning levels between you and your spouse (or common law partner) differ significantly, you may want to employ a strategy known as income splitting. The income-splitting strategy you employ will depend on your life stage; in the retirement years, it’s a little more straightforward – you can split up to 50% of the higher earning spouse’s pension income. If you haven’t reached age 65, you have two more indirect options. First, the higher-earning spouse could contribute to the lower earning spouse’s RRSP. Alternatively, the higher-earning spouse could offer the lower-earning spouse what is known as a spousal loan with which the spouse could invest. As the term ‘loan’ may imply, this is a formal agreement that requires a contract, repayment terms and a nominal interest rate. If set up properly, investment earnings are then attributed to the borrowing spouse, allowing the investment income to be taxed at a lower rate.

Be diligent in your record keeping 

Keep pristine records of your expenses, particularly if you’re self-employed.  As a self-employed person, you’re likely incurring lots of expenses that can be at least partially attributable to your work – cell phones, internet, business use of home, etc. Even if you’re not self-employed, it’s still important to keep records of potentially tax-deductible expenses. Childcare expenses, some medical expenses, public transit, moving expenses, child education tuition, union dues, and other expenses can all come into play and save you some money come tax time. Create a spreadsheet, or a paper file, and track, track, track!

Employ a few of these tax-saving strategies and maybe, just maybe, you’ll have some pleasant surprises come tax time this year!