Taxes make Canada one of the best countries to live in, so they are necessary. A citizen must pay taxes, and it’s a smart way to stay on the good side of the Canada Revenue Agency (CRA). However, there are legal ways you can keep a bit more of your income. Below are some things you can do to pay less tax in Toronto.
Maximize RRSP Contributions
The federal government has long since paved the way for Canadians to pay less tax and save for retirement. It introduced the Registered Retirement Savings Plan (RRSP) in 1957. Canadians can contribute 18 percent of the previous year’s income or a fixed amount set by year, whichever is lower.
The RRSP’s tax consequences include deducting your contributions from your income, effectively reducing your tax due. For example, suppose your income for 2023 was $60,000, and you contributed $20,000 to your RRSP. The CRA will calculate your income tax based on $40,000.
However, the RRSP is not a tax shelter but a tax deferral. When you withdraw money from your RRSP account, it becomes subject to withholding tax as income. That is unless you use it for educational or first-home purchases. In any case, there are specific rules and procedures to follow when making a withdrawal. Ensure you can afford to allocate those funds to an RRSP account.
The best way to maximize the benefits of an RRSP is to start withdrawing when you’re making less money. For example, you are retired, so your income bracket is lower. Essentially, you waited to pay tax on income you earned decades before so you could pay less.
Remember that the deadline for contributing is February 29, 2024, for the 2023 tax year. The maximum you can contribute is $31,560.
Put Money Into a TFSA
Suppose you want a simpler alternative to an RRSP to lower your taxes. Consider depositing your money into a tax-free savings account (TFSA).
Introduced in 2009, the TFSA allows people 18 and over with a valid social insurance number (SIN) to invest money without paying taxes. The money you put into a TFSA is not deductible like the RRSP. However, any dividends, interest, or capital gains you earn from the funds are tax-free. You can also withdraw funds anytime for any reason without incurring additional taxes.
You can have multiple TFSAs of various types, such as deposits, annuities, and trusts. Still, the government sets a yearly limit for all your TFSAs. For 2023, the limit is $6,500, so the most you can deposit for all your TFSAs combined cannot exceed that.
Hire a CPA
It might sound counterintuitive, but hiring chartered professional accountants (CPAs) to do your taxes can save you money. You can do it yourself, but you might be signing up for more headaches than you should. A CPA can identify valid deductions you wouldn’t have known about and save you hundreds of dollars in taxes. These deductions may include travel, supplies, and even a home office.
A professional tax preparer is especially important if you run a business or work as a freelancer. Managing your taxes in these instances is more complex than a traditional employee, making missing opportunities to pay less tax easier.
Split Your Income
Married couples and common-law partners can save tax dollars with income splitting. Income splitting involves spreading money earned within a family to reduce the overall tax burden. In most cases, the spouse in a higher tax bracket can distribute income to the spouse in a lower bracket. The idea is to lower the tax bracket of the high-income earner, thus reducing the tax due.
Spitting income is an electable action, meaning you must inform the CRA of your intention when you file your taxes. You do this by completing Form T1032 (Joint Election to Split Pension Income).
However, you can’t simply give money to lower-income earners in the family. The CRA requires splitters to declare income sources. Any income transferred from one spouse to another is subject to a higher tax rate. You can avoid this by contributing to a spouse’s RRSP or TFSA or giving them a loan.
Because income splitting tends to be a hot topic with the CRA, it would be best to consult a CPA before proceeding.
Deduct Medical Expenses
Many people are unaware that medical expenses, such as prescription medications and dental visits, are deductible. You can claim eligible medical expenses on Lines 33099 and 33199 of your tax return and get tax credits. The allowable amounts and tax credits will depend on your province or territory.
Final Thoughts
There is no shame in using strategies to lower your tax bill legally. The federal government provided these programs to benefit its citizens, so it would be prudent to take advantage of them.
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