Effective Tips to cut your tax bills this year

No one is immune from the desire of paying less taxes. As tax experts and tax accountants in Oakville and Toronto, we can help you keep more of your hard-earned money. We strategize to minimize your tax exposure. Here are some smart strategies to pay less tax without raising the ire of the Canada Revenue Agency.

Hoping for a pay raise? How about a Non-Cash Gift, Instead?

A pay raise or cash incentive – cash is always better right? However, I would rethink this when a non-cash gift is saving me tax!

The Canada Revenue Agency has an administrative policy that exempts non-cash gifts under certain circumstances. If the total value of all non-cash gifts during the year does not exceed $500 per employee, the gift(s) are non-taxable to an arm’s length employee.

For example, consider yourself as an employee in a 26% tax bracket. If you receive a non-cash gift for $500 from your employer, then no tax liability is due on you for this gift. However, if you receive a pay raise for $500 then you would only receive $370 (500 – 26%*500) after-tax. 

Always consult with a tax professional in Oakville also in Mississauga before calculating taxable benefits related to gifts.

Consider running a Canadian family business

Bringing family members on board as business partners can help you grab tax advantage through ‘income splitting’.

Splitting business income with family members is a great way to reduce your family business tax. It shifts income from one family member paying a higher rate of tax to another taxpayer within the family paying tax at a lower rate.

Adding your family members as business partners will entitle them to a share of business profits. This profit splitting will ultimately reduce your tax liability because the business income will fractionalize among family partners, instead of being included only in your taxable income.

To learn more about how this tax-saving strategy works, read the article “Tax rules for income splitting in Canada- 2020”. Also, tax rules concerning partnership and income splitting are a bit complicated, I advise you to consult a tax professional in Toronto and Hamilton for insightful tax planning for your business.

Offset your car expenses against your taxable income

If you use your car for business purposes either as a self-employed or an employee, you can claim the related business expense on your income tax return. On line 9281 of your T2125 form, Motor vehicles expenses, you may be eligible to claim are:

• License and registration fees
• Fuel and oil costs
• Insurance
• Eligible interest on money borrowed to buy a vehicle.
• Maintenance and repairs.
• Eligible leasing costs.
• Parking fees
• Toll charges

You can only claim a portion of these expenses that are directly related to business use. To know how much of your use of the vehicle was directly business-related Canada Revenue Agency recommends using a logbook. The most reliable evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year.

An employee (not a self-employed person) can deduct motor vehicle expenses if meets the following conditions:

• You are normally required to work away from your employer’s place of business or in different places
• Under your contract of employment, you had to pay your own motor vehicle expenses. If your employer reimburses you for the expenses or you refuse a reimbursement or reasonable allowance from your employer, you cannot claim this deduction.
• You must obtain a copy of Form T220, Declaration of Conditions of Employment, which has been completed and signed by your employer.

Claim real estate tax depreciation on your rental property

Owning rental property provides not only income but also deductions you can claim at tax time. Real estate depreciation (also known as capital cost allowance) allows you to deduct the costs from your taxes of buying and improving a property over its useful life. Thus, it lowers your taxable income in the process.

You can claim capital cost allowance (CCA) at the rate of 4% for residential rental property and 6% for commercial property.

Note: Land isn’t considered depreciable since it never gets “used up”. Only the building portion qualifies for tax depreciation.

For example, you purchased a rental property (commercial) worth $100,000. 70% of the value is attributable to the land and 30% to the building. You can calculate the CCA as:

(Total value of property* percentage attributable to building* depreciation rate) = CCA

         100,000 * 30% * 6% = $1,800

         In this example, you can deduct $1,800 tax depreciation from your rental income.

         However, this calculation is not that simple as it seems. Rental property tax laws are complicated and change periodically, it is always recommended that you work with a professional tax accountant in Toronto and Mississauga (or anywhere else). That way you can be sure to acquire the most favorable tax treatment and avoid any surprises at tax time.

         For more details on how to prepare rental property tax returns read my article “How to Prepare and File Tax Return for Rental Property in Canada”

         Maximize your RRSP contribution

         It might be in your knowledge that RRSP contributions are tax-deductible, meaning that you can deduct the amount you contribute from your taxable income when filing your taxes. This means potentially paying less and saving more.

         If you run out of cash to make RRSP contributions, you can still contribute in-kind. As long as you remain within your contribution limit, in-kind contributions to a registered account are also possible. CRA allows several investment products that can be used to make in-kind contribution including:

• Equities (both Canadian and foreign stocks)
• Guaranteed investment certificates (GICs)
• Mutual funds
• Corporate bonds
• Shares of public companies
• Canadian Mortgage
• Life insurance policies
• Gold and silver coins and bars and equivalent certificates
• Income trusts
• Treasury bills

I always recommend seeking expert financial advice when it comes to such tricky strategies to cut down on your tax bills and be in contact with an accounting firm.

For summarized information on RRSP, how it works, how you can contribute, how and where to register please visit my blog “RRSP Deadline For 2020 Tax Year”. For details, you can visit the CRA official page.

If you need any advice on tax-saving strategies from an expert tax accountant in Toronto, Mississauga, Oakville, and Hamilton feel free to reach out to Filing Taxes at 416-479-8532? Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting firms and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.