Taxes annoy almost everyone except accountants, yet they are an unavoidable reality of life. The regulations are always changing, and it may seem that the deck is stacked against the honest taxpayer. Don’t worry; there are still easy options for Canadians to decrease their tax liability. We’ll look at a few of them in this post.
- If you reside or make money in Canada, you must pay income tax, just like everyone else.
- If you know the current laws and can take advantage of them, Canadian tax law offers you numerous strategies to lower your tax liability.
- Contributing to a retirement plan, deducting interest, and taking advantage of small company incentives may all be beneficial. When in doubt, consult a professional accountant.
Borrow to Invest, Save to Buy
The days of debt-free life are long gone, and practically everyone in the nation is in some kind of debt. Surprisingly, the appropriate form of debt might assist in making a modest hole in your tax burden. A vehicle loan or credit card debt accrued to purchase that new couch you’ve been eyeing is not the correct form of debt. A loan used to buy an investment.
The rationale for this is because interest on loans used for investment is tax deductible. The interest on everything else you borrow to purchase is not. From a tax standpoint, it is preferable to use cash or savings for these discretionary expenditures and then borrow to invest rather than the reverse. However, when it comes to your personal finances, no debt is the best type of debt.
Max Out Your RRSP
Registered retirement savings plans (RRSPs) are the government’s feeble apologies for tax evasion. You may as well take advantage of the bone they toss at you and get the most out of this instrument. When it comes to borrowing to invest, maxing out your RRSP is typically a good idea as long as you can pay the debt in a fair amount of time.
Taxes and Investments
Stocks, for example, get favorable tax treatment on dividends and capital gains, but other fixed-income assets do not. Holding your money in taxable fixed-income assets may potentially cost you money, depending on your tax bill and the rate of inflation. Consider retaining a lesser share of your fixed-income assets in the taxable portfolio if you have a tax-protected retirement account and an income portfolio.
Income splitting with your spouse or contributing to their retirement account can assist decrease your tax burden, particularly if your salaries are significantly different. However, professional help will be required to organize donations in a manner that will survive an audit.
Start a Business
When you own a company, you may deduct costs that you spend to help you generate money. These might include the use of your automobile for commercial purposes, your home office, wages given to your children, and any materials you use to produce products or services. This suggestion is often given as a strategy to decrease your taxes. While it is true that having a side company may help you save money on taxes, it is not for everyone. Farmers, for example, benefit from some of the most generous tax reductions available, yet they seldom generate enough money to actually benefit from them. Creating a company that loses money, like farming, would harm your total financial status more than paying taxes. If you have a business strategy that indicates you will make a profit, go for it. If not, consider a different approach.
The Bottom Line
It might be tough to keep track of which write-offs apply to your scenario. Finding the appropriate accountant is the most crucial step for most individuals in lowering their taxes. All of the tactics outlined above are legal, but your accountant can look at your finances and tell you which ones are realistic. Find an accountant via friends and coworkers who have tax profiles comparable to yours. Most essential, stay on top of your tax status and keep an eye out for anything your accountant may have overlooked—accountants are still people, after all. The more you know about your personal tax status and how to minimize your exposure, the better equipped you’ll be to take full benefit of your accountant’s knowledge.
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