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How to Save Money on Taxes. Practical Tax-Saving Strategies for Canadians

  • M P
  • Jan 15
  • 3 min read

Updated: Jan 16


Introduction

For most Canadians, tax is indeed the largest annual expense. Understanding the tax system and employing effective strategies can significantly reduce your tax burden and help you keep more of your hard-earned money. This guide provides practical, legal ways to save money on taxes in Canada.


1. Maximize Registered Savings Plans

  • RRSP (Registered Retirement Savings Plan): Contributions to your RRSP are tax-deductible, reducing your taxable income for the year. Investments grow tax-free until withdrawal, typically when you may be in a lower tax bracket.

  • TFSA (Tax-Free Savings Account): While contributions are not tax-deductible, investment growth and withdrawals are tax-free. Use your TFSA for investments with high growth potential to maximize tax-free gains.

  • RESP (Registered Education Savings Plan): Save for your children's post-secondary education and benefit from government grants and tax-sheltered growth.

  • The First Home Savings Plan (FHSP) provides tax advantages that can help individuals save for their first home. Here are the key ways it offers tax savings:

    • Tax-Deductible Contributions: Contributions made to the FHSP may be tax-deductible, reducing the individual's taxable income for the year.

    • Tax-Free Growth: Any investment income earned within the FHSP is generally tax-free, allowing savings to grow without being subject to annual taxes.

    • Tax-Free Withdrawals: When funds are withdrawn from the FHSP for the purchase of a first home, these withdrawals are typically tax-free, providing further savings.

     By utilizing the FHSP, individuals can maximize their savings while minimizing their tax liabilities, making it a beneficial option for first-time homebuyers.


2. Claim All Available Tax Credits and Deductions

  • Medical Expenses: Keep receipts for eligible medical expenses and claim them on your tax return. If you have a spouse, it may make sense to claim the medical expenses on the lower-income spouse.

  • Charitable Donations: Donations to registered charities can provide valuable tax credits.

  • Home Office Expenses: If you work from home, you may be eligible to claim a portion of your home expenses.

  • Tuition and Education Amounts: Students can claim tuition fees and may transfer unused credits to a parent, grandparent, or spouse.

  • Childcare Expenses: Claim allowable childcare costs if you have dependents.


3. Split Income Where Legally Permitted

Income splitting involves shifting income to a family member in a lower tax bracket, reducing overall family tax. For example, consider:

  • Pension Income Splitting: Seniors can split eligible pension income with a spouse or common-law partner.

  • DBPP plans can be income split before age 65

  • Investment income can be split between spouses even if T-slips are issued to only one spouse.

  • Attribution Rules: Be aware of CRA rules regarding gifts or loans to family members; consult a tax professional to avoid penalties.

4. Use Capital Gains Favourably


  • Only 50% of capital gains are taxable in Canada. Consider holding investments for the long term to benefit from lower taxation on capital gains compared to interest income or dividends.

5. Leverage Small Business Deductions


If you are self-employed or own a small business, take advantage of business deductions:


  • Deduct reasonable business expenses such as office supplies, advertising, and travel.

  • Consider incorporating your business to access the lower small business tax rate.


6. Plan Your Timing


  • Defer Income: If possible, defer bonuses or self-employment income to the following year to manage your tax bracket.

  • Accelerate Deductions: Pay deductible expenses before year-end to claim them sooner.


  1. Consider Debt Swapping or the Smith Manoeuvre™


  • In Canada, when you borrow money to invest in income-producing assets (such as stocks that pay dividends or interest), the interest you pay on that loan is generally tax-deductible. This means you can subtract the interest payments from your taxable income, reducing your overall tax bill. The key requirement is that the investment must have a reasonable expectation of generating income (not just capital gains). This principle is recognized by the Canada Revenue Agency (CRA) and is a cornerstone of strategies like the Smith Manoeuvre™.

  • See the post on Leveraged investing and the Smith Manoeuvre™.


8. Stay Organized and Seek Professional Advice


Keep thorough records of your income, expenses, and receipts. Tax laws change frequently, so consulting a qualified tax professional or accountant can help you identify opportunities and avoid costly mistakes.


Conclusion


While taxes are inevitable, proactive planning and a good understanding of the Canadian tax system can help you minimize your largest expense. Start early, keep good records, and use available credits and deductions to your advantage. Remember, every dollar saved on taxes is a dollar in your pocket!


Matthew Perry Tax Prep



 
 
 

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