Tax saving means a reduction in taxes payable — reductions for which the person or entity cannot be indemnified by Canada Revenue Agency. Tax liability reduced within the intent of the law is tax planning and is ethical to do. Contrarily, if the intent is to exploit the law for illegal non-payment or underpayment of tax then it is termed as tax evasion, not tax saving. This basic clarification is a prerequisite for designing a tax-saving plan.
It is crucial for both an individual and an organization to be tax efficient. A tax-saving plan ensures that all elements work together to lower the amount of taxable income. Tax saving helps you reduce tax liability and save extra cash to reinvest.
Well, the interesting part begins from here. Every small business and individual wants to limit their tax exposure, but the question arises, HOW? Taxes cannot be avoided altogether, but efficient tax planning can drop you to lower tax brackets. In this article, we will look at some ways in which Filing taxes can help you minimize your tax burden and maximize your income.
1. Optimize your RRSP
Registered Retirement Savings Plans (RRSP) offer an immediate benefit when it comes to your tax return and it is available to everyone. The money you contribute to the RRSP and the investment held in the plan are sheltered from taxes until you start withdrawing the money. Hence, you can enjoy tax-deferred growth on your savings until the funds remain invested.
Caution: Based on income, a maximum ceiling for contribution in RRSP will be determined. Your excess contribution will be subject to a 1 percent penalty monthly in excess of $2,000 until you withdraw the excess.
Tax-Free Savings Account (TFSA) contributions are not tax-deductible. However, as TFSA contributions are made from post-tax income, there is no tax obligation when those funds are withdrawn later. Any income earned in the account (e.g. investment income, dividends, and capital gains) is generally tax-free for life, even when it is drawn out. Stock, bonds, mutual funds, and high-interest savings accounts can all be held inside TFSA.
Caution: Over contribution that is exceeding your TFSA limit is subject to 1 percent per month penalty tax until you withdraw the overcontribution.
Leveraging simply means borrow to invest. There is a tax benefit of paying interest on money borrowed to purchase income-producing investments. This strategy can be significantly effective if the potential return on investment exceeds the cost of borrowing. It might seem a bit complicated technique of tax saving, you can approach Filing taxes to help you. Our tax professionals will use this tool to help you build your wealth and save you money to grab your desires.
4. Writing off Employment Expenses
If you have out-of-pocket expenses associated with your job you may be able to claim a tax deduction for these expenses. Unreimbursed employee expenses incurred for the business task of being an employee qualify for a tax deduction. Reimbursed expenses can also be claimed for tax deduction only if your employer includes the reimbursement as taxable income. Some examples may include car expense, where a car is required for work; home office expense for workspace at home; salary paid to assistant.
You must complete form T2200 (Declarations of conditions of Employment) which must be signed by your employer.
5. Tax preparation fee
If you are self-employed, a sole proprietor, a freelancer, an employee who works from home, or a small business owner then you can avail the opportunity to save tax by claiming tax preparation fees. This deduction can also be claimed if you earn a rental income.
6. Hire a family member
Recruiting a family member in business can earn you a two-way benefit. First paying a salary to a family member you employ will reduce your net income which may scale-down your personal income tax. Secondly putting your family on payroll will move the business income into their hands in minimal tax brackets so they will be paying little or no tax on the salary received. Two fundamental requirements shall be satisfied to take advantage of this strategy:
7. Writing off losses
Whenever you experience a loss, the consoling factor in this situation is that losses can be applied for legitimate tax deductions. There are two types of losses that you can claim for a tax deduction. A capital loss occurs when an asset is sold at a price less than the sum of its purchase price and any capital improvements you made to it. Capital losses can only be written off against capital gains. Business loss incurs when business expenses exceed your income. They can be written off against any other income you report that year. Both the losses can be carried back to 3 preceding years and capital losses carried forward to any future year whereas business losses can be carried forward for 20 years. This benefit is usually overlooked by the taxpayers as they find it difficult to make adjustments. Reach out to to an accountant to claim your rightful tax deductions against losses you encountered.
8. Knock off home office expenses
Expenses related to the business use of the home are tax-deductible. This can be claimed in case that home space is your personal place of business or you use that space to earn your business income. Utility bills, maintenance costs, rent, mortgage interest, property taxes, and home insurance are legitimate expenses recognized by CRA for a tax deduction. These expenses shall be apportioned precisely to be utilized as a tax benefit.
9. Claim medical expenses
Qualified unreimbursed medical expenses exceeding the threshold set by CRA can be deducted by taxpayers. The set minimum limit is 7.5% of your adjusted gross income. This can be claimed for your spouse, common-law partner, and children under 18 years of age. You can also claim medical expenses for your, spouse’s or common-law partner’s dependents such as parents, grandparents, siblings, aunts, uncles, nieces, and nephews.
10. Harmonized tax planning
Tax is not a matter to be dealt with once a year it demands a properly planned structure to work out for the taxpayer’s benefit. Hence all the documentation shall be appropriately managed, records of all transactions that can be of use when filing taxes shall be organized and saved so that you may not overlook any important piece of information.
11. Claim the maximum tax credits
A tax credit is far more valuable than a tax deduction as it directly cuts down your bottom-line tax bill. Non-refundable tax credits can pull down your tax liability to zero. Additionally, if refundable tax credits exceed the tax amount you owe in taxes then you will receive the difference in a refund. Hence you need to be very vigilant about tax credits when preparing your tax return.
12. Flexible spending account
It allows you to hoard funds for qualifying healthcare expenses on a pre-tax basis, shrinking your tax bill. The contributions made to this account will not show up as taxable income.
Caution: The contributions to this account shall be consumed during the year otherwise they will be wasted. A benefit either use-it or lose-it.
13. String out the investment holding
It is a smart strategy to drop off taxable income. Tax rates on long-term capital gains are less than the tax rates on short-term capital gains. It is wise to keep the investments at least for more than a year to reap the benefits of lower tax rates on capital gains.
14. Use an accurate filing status
Filing your tax return with the wrong status can be disastrous as it is a determining factor of the rate at which income is taxed. This may deprive you of numerous benefits you could have availed of if the right status had been selected. Filing Taxes renders its best efforts to thoroughly study the client’s profile and suggest the most suitable filing status that can aid in reducing the tax liability.
If you are looking for a professional Tax Accountant to file your personal taxes then feel free to reach out to Filing Taxes at 416-479-8532. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
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.