While we all have to pay taxes, there are many ways to reduce your taxable income in Canada, and they all depend on your personal situation.
Taxable income is the portion of income used to calculate how much taxes an individual or company owes in a given tax year. Taxable income is frequently described as adjusted gross income (AGI) minus deductions or exemptions. The strategies for reducing your taxable income can be broken down into three main categories: deductions, tax credits and other strategies.
Deductions are expenses that you can subtract from your total income to reduce the amount of taxes you owe. Tax credits are subtracted from the final tax bill and are more valuable than deductions because they reduce the amount of taxes owed instead of just reducing the amount of taxable income. Other strategies include things like contributing to an RRSP or TFSA account or donating to charity.
Our team has compiled a list of 7 strategies to reduce your taxable income in Canada:
Ontario Seniors’ Public Transit Tax Credit
As an Ontario senior, you are eligible to claim the refundable public transit tax credit. To qualify you must be a resident of Ontario as of December 31, 2021. You must also be 65 years old or older on the last day of the previous tax year that you’re claiming the credit. You can claim up to $3,000 in eligible public transit expenses and receive up to $450 each year.
Claim Medical Expenses
Several medical expenses that are not covered by your health benefits plan can be claimed as a tax credit. Some expenses might include dental checkups, eyeglasses, prescriptions and orthopedic shoes. Make sure to keep copies of all your receipts and any other supporting documentation.
In Canada, child care expenses are deductible from your total income, which means they can reduce the amount of tax you owe. To claim child care deductions, you will need a receipt for each expense and a T4A slip from your daycare provider.
Childcare expenses include but are not limited to:
- Caregivers providing child care services
- Day nursery schools and child care centres
- Educational institutions, for the part of fees that relate to child care only
- Day camps and sports schools where the primary goal of the camp is to care for children
- Boarding schools, overnight sports schools or camps where lodging is involved
Home Office Expenses
For self-employed individuals, if you run a home-based business or use a home office you can claim a percentage of your rent, mortgage interest, utilities and other expenses. If you’re one of the many Canadians who had to work from home due to the pandemic, you can use the CRA’s new temporary flat rate method, which lets you claim $2 for each day you worked from home, up to a maximum of $400 (200 working days).
Contributing to a Tax-Free Savings Account is another great way to reduce your taxes in Canada. A TFSA is an account that allows you to set money aside, tax-free, throughout your lifetime. Unlike an RRSP a TFSA lets you withdraw money without penalty. In 2022 the TFSA contribution limit is $6,000 which means that the lifetime contribution limit is now $81,500.
Contributing to a Registered Retirement Savings Plan (RRSP) is a smart way to reduce your taxable income while simultaneously saving for retirement. When you contribute money to an RRSP, your funds are exempt from being taxed. Your contribution limit is the maximum amount you’re able to contribute to your RRSP in a given year. The RRSP contribution limit for 2022 is 18% of the earned income you reported on your tax return in the previous year, for up to $29,210. The main purpose of a RRSP is to help you prepare for retirement and other financial needs.
Donating to a qualifying donee can help you earn both provincial and federal non-refundable tax credits while offsetting your tax bill. Up to 75% of your net income can be claimed as eligible charitable donations. In any one year, you may claim:
- donations made by December 31 of the applicable tax year;
- any unclaimed donations made in the previous five years; and
- any unclaimed donations made by your spouse or common law partner in the year or in the previous five years.
Donations of securities (stocks, bonds, ETF’s, mutual funds, etc) that are held in taxable accounts with unrealized capital gains can be a particularly effective strategy. The charity receives the full value of the securities, while the donor gets a tax credit of an equal amount, while, importantly, no taxable realized capital gain is created in the process.
Although we can’t escape paying taxes, there are many smart and effective ways to legally avoid paying more taxes than you need to. If you still have questions, don’t hesitate to reach out to one of our Portfolio Managers today for further guidance.
Interested in learning more about the benefits of TFSAs and RRSPs? Read our blog: “Tax-free and tax deferred ways to save for the future: Comparing TFSA and RRSPs”.