Top 5 Ways to Save Money on Your Taxes
Tax evasion is illegal, but avoiding paying unnecessary taxes is not. There are a number of totally legit ways to reduce your tax bill, which will help you protect your net worth.
1) RRSP Contributions
Nearly anyone can have a Registered Retirement Savings Plan (RRSP). It is, by far, the most utilized tax-reduction tool for Canadians. You can contribute up to 18 per cent of your income, up to $24,930 for the 2015 tax year and that limit is indexed, meaning it will grow with inflation, into the future. The limit can sometimes vary depending on your pension program at work . These contributions are fully tax deductible and they grow tax-deferred until withdrawal. The greater the amount you contribute, the more income you get to deduct. If you can’t maximize your RRSP limit, you can carry-forward the contribution room indefinitely.
2) TFSA Contributions
The Tax Free Savings Account (TFSA) allows you to grow your money tax free. So, when you withdraw the funds, which you can do without penalty at any time, you don’t pay tax on capital gains, dividends, trust distributions, or interest earned. On the flip side of this, capital losses within the plan are not tax deductible and dividends aren’t eligible for the dividend tax credit. You can contribute up to $5,500 for the 2015 tax year and that limit is indexed into the future. Unused TFSA contribution room can be carried forward.
3) Dividend Tax Credit
When you invest in non-registered investment plans you can reduce taxes through the dividend tax credit and favourable capital gains tax rate. Non-registered investment plans fall outside the RRSP, TFSA, Registered Retirement Income Funds and typically your pension. Non-registered plans are not registered with the government, they do not have limits and earned income must be included as taxable income each year. Dividends are paid to investors who hold certain stocks. The dividend tax credit reduces the taxes that would be paid on this income. Capital gains (appreciation) are taxed at a more favourable rate when compared to your personal income tax rate. Capital gains (and losses) are incurred when an investment is sold.
4) Charitable Giving
Charitable giving reduces taxes AND supports your community. When you give money to a registered charity, the charity issues you a tax receipt that goes toward a tax credit when you file your return and then you ultimately decrease the taxes you pay. If you don’t use the full tax credit, you can carry it forward.
5) Tax Credits and Benefits
Do you fit into any of the following groups?
- Low-income household
- Business owner
- New home buyer
- Care giver
- Individual or family paying for medical care
There are many tax credits available for Canadians including those for home purchase, renovations, child care, transit, extended medical/health expenses, and so on. Check the CRA website to see which personal or business tax credits apply to you.
This article was featured in the March MeVest Newsletter.
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