Personal Taxes in Canada & Strategies for Saving
Understanding how personal taxes work in Canada can be a daunting task. However, comprehending the tax calculation framework and various strategies can help you save more of your hard-earned money. This blog post deciphers the tweet series we recently published on how personal taxes in Canada work and ways to minimize your tax burden.
The Personal Tax Framework in Canada
The personal tax system in Canada can be broken down into three calculations:
Adding your income and subtracting deductions to get your taxable income.
Multiplying your taxable income by the tax rates to find your tax otherwise payable.
Subtracting tax credits and payments from your tax otherwise payable to find out your tax owing/refund.
Now that you understand the structure let's explore how to lower your tax obligation.
Strategies to Save on Personal Tax
Earn Less Income or Income Exempt from Tax
While it might sound counterintuitive, what we mean is to try having less income reported on your tax return. You can do this by:
Earning investment income through tax-exempt or tax-deferred accounts like TFSA/RRSP/FHSA/RESP.
Implementing income-splitting strategies with other family members.
If you have self-employment income, consider earning that income through a corporation.
Increase Deductions
Increasing deductions reduces your income, hence, you pay less tax. Here are some strategies:
Take advantage of employment expenses. Negotiate these expenses as a condition of your employment.
Make RRSP contributions.
Claim eligible child care expenses.
Earn legitimate business income to deduct business-related expenses.
If part of your income is from sales, negotiate some commission income, which allows for more deductible expenses.
Lower Your Tax Rate
Different types of income attract different tax rates. Dividends & capital gains are taxed at lower rates than employment income. While there's less flexibility here, aim to maximize RRSP/TFSA/FHSA contributions before earning capital gain/dividends personally.
Increase Your Tax Credits
There is an extensive list of tax credits and deductions available. We recommend you go through them here to see if you are eligible for any that you might not have claimed.
Your Tax Strategy with Tax Heroes
At Tax Heroes, we are committed to guiding and supporting our clients through the complexities of tax planning and saving. Follow us on Twitter for more tax advice and tips. If you have questions or need assistance with your personal tax strategy, don't hesitate to reach out. Our team of experienced professionals is here to help you navigate your tax journey.
