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What to do to save tax in Canada?

on Mon, 10/05/2015 - 22:55

As a financial advisor, I always have discussion with clients and prospect on cashflow management, tax strategies and saving strategies. Whereas tax strategies seems to be one of the most brought-up issue (knowing that we pay high tax in Canada, this probably not surprising). 

The Canadian taxation system is a gradual system, the more income you earn, the more tax you pay. If you are not sure how much tax you should pay, CRA has listed what percentage how much income should be taxed. If you want to know the exact amount you need to pay based on your income, Ernst & Young has an online calculator to help you figure that out.

First and foremost, TFSA (tax free saving account) is the most effective way to save tax for any residents who are 18 years and older…

Regardless, we all want to find out different ways to save tax and here are some of them (all numbers based on Ontario income):

If your income is lower than $11,327
you are not paying tax at all, so congrats! you have no tax problem!!

If your income is between $11,328 to $44,701
you have little tax problem. Suggest to contribute into RRSP but not claim that until higher income down the road.

If your income is between $44,702 to $89,401
your tax problem is so much higher than those mentioned above,  suggest you make sure to contribute into RRSP, enough to push you down one tax bracket (to calculate how much to contribute,  Ernst & Young has an online calculator on that too. You might also want to start understanding different tax implication to your investment holdings.

Here we go… for anyone’s income is higher than $89,402, you seriously want to consider the following methods (disclaimer: the following strategies are available on markets, but of course, nothing is for everybody. TruFinancail might not access to all of them, this is a reference article, doesn’t mean we have them all offered, please contact us for further info)

1. RRSP (of course)

2. Investment loans
Works very well with risk-takers and high income earners, interest paid can be deducted to purchase stocks or other income producing investments. 

3. Set up a small business
You probably incur business loss in the first few years, on top of that, you can write off some of your expenses. Under certain situations, you might want to consider buy into a money-losing business… so that you can claim an “allowable business investment loss” (ABIL) on your tax return.

4. Income spliting
Spilt income to your spouse or adult child (if they don’t have as much income as you do) - you can hire them to do that.

5. Donate
The 2013 budget added the First-Time Donor Super Credit which is only available between the years of 2013-2017, replacing the existing non-refundable charitable donation tax credit. A first time donor will be allowed to deduct 40% of donations $200 and under and 54% for donations over $200 without exceeding the maximum of $1000. (For more information visit the CRA website)

6. lend to your spouse
Making a loan to your spouse at CRA’s prescribed rate of interest, which is 1%!! The money can be used to invest in a business, high interest bearing investments, stocks, real estate, etc.

6. Pension spilting
Same idea on income splitting, if you are a senior citizen, you can have some amount of your pension income entered under your lower-income spouse.

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