Everyone hates taxes. However taxes are the way that our government is able to provide free healthcare, free education and for all the other services that we as Canadian enjoy including Free Money that Canadian families receive (check out this blogpost).
However there are smart and legal ways that we could pay less in taxes by taking advantage of ways the federal government has laid out tax credits and deductions.
How much do we Canadians pay in Taxes?
Well first we have to know what we pay in taxes.
If you go to this website www.neuvoo.ca
You can get an estimate of how much you pay in taxes. You can even break it down further into federal and provincial taxes too. You can break down your salary to discover how much you are making after taxes per month, bi-weekly, weekly, daily and even hourly!
I had a client ask about marginal and average tax rates and there is a great explanation of it in this article: Marginal Tax vs Average Tax.
1. File your Taxes on time to avoid late fees
The best way to pay less in taxes is to first file your taxes. So that you have an accurate representation of your earnings and deductions.
If you file late and have a balance owing to the Canada Revenue Agency, the late penalty is 5% of the outstanding balance, plus 1% of the outstanding balance for every month that your return is late, to a maximum of 12 months.
The deadline to file your taxes is April 30, 2022 this year.
2. Be Organized
If you decide to hire an accountant instead of doing your own taxes, then keep accurate and organized records of your receipts, whether that's for childcare or extra curricular activities. The more organized your receipts are, the less you will have to pay your accountant, which means, more of your tax return in your pocket.
3. Contribute to your Registered Retirement Savings Plan
I know this is an obvious statement that you have probably heard many times.
If you contribute to your RRSP, you will save on taxes NOW because it is a tax deferral for later.
Many people don't understand that it is a tax deferral and hopefully, when you pay the taxes on this RRSP income later in life when you are retired, you will pay slightly less in taxes because you will be retired and therefore making a smaller income.
Remember! Don't just contribute money into your RRSP but also decide how you are going to invest it. Check out this blogpost for a quick introduction: How to Invest your TFSA and RRSP.
You could also do an estimate with an RRSP Tax Savings Calculator to estimate how much you save in taxes by contributing extra money towards your RRSP. This is especially important, if you are a higher income earner! Some experts say to estimate 20% savings in taxes from your RRSP contribution.
This RRSP Tax Savings Calculator will initially demonstrate your initial tax refund without all your personal information and deductions.
Then you can it to input various RRSP contribution amounts and see how much your tax refund amount changes.
For example, if you contributed $1000 to your RRSP, your initial refund will go up another $305.
or if you contribute $5,000 to your RRSP, your initial refund will go up another $1,525. ($1500 is approximately 27% of $5500)
Plus you could get the additional benefit of taking your tax refund and adding it to your RRSP again to increase your investment returns.
The sooner that you can get compound interest working the more benefit you will have. Check out this blogpost about How Compound Interest Could Make You a Millionaire.
Another bonus is that RRSP contributions, can potentially lower your tax bracket, which could potentially increase your monthly CCB (Canada Child Benefit) amount which means more money for your children or towards savings for RESPs! If you haven't started setting aside money towards your children's post secondary education, check out how to in 4 Steps to Start your RESP.
4. Deduct Home Expenses
The government changed some things this year, due to the pandemic.
There is a temporary flat rate method, with the new T777S form that lets you make a claim without a signed form from your employer or even receipts from your expenses.
You can claim $2 for each day you worked remotely, up to a maximum of $400 — 200 working days — per individual. Sharing your home office with someone else? You can both make the maximum claim.
The eligibility for the flat rate method is:
You must meet ALL of the criteria listed below on the CRA website.
You worked from home in 2020, 2021, or 2022 due to the COVID-19 pandemic
You worked more than 50% of the time from home for a period of at least four consecutive weeks in the year (2020, 2021, or 2022)
You are only claiming home office expenses and are not claiming any other employment expenses
Your employer did not reimburse you for all of your home office expenses
Another option is to fill out the,
Detailed Method of Work from Home:
This is where you can claim the actual amounts you paid for expenses. Some expenses that can be claimed include electricity, heat, water, utilities, home internet access fees, maintenance and minor repair costs and rent paid for a house or apartment that you rent.
Please refer to the CRA website for all the specific details about which expenses can and cannot be claimed and what type of employment work situation this is in reference to. They have it laid out very clearly with specific examples.
5. Donate to Charities
Another good method to use to increase your tax credits/refund is to donate to a charity of your choice.
The CRA has a great Charitable Donation Calculator that you can use to decide how much of an impact a donation will make on your taxes.
You just need to input your income, donation amount and province.
and the results will calculate your federal, provincial and total tax credits.
It is Calculated as:
15% on the first $200 of total donations
33% on whichever of the following amounts is less: the amount of the donations for the year above the first $200
the amount of the taxable income that is over $200,000 (2016) or $202,800 (2017)
29% on the total donations for the year above the first $200, which are not eligible for the 33% rate above
Ultimately there is the potential to get a 15-33% tax credit refund from a donation to a charitable organization!
6. Medical Expenses
You can claim some medical expenses to reduce your tax bill.
Some examples include:
a baby breathing monitor
gluten free food products
medical services outside of Canada
specialized treatment plans
moving expenses if you are disabled and need a more accessible living situation
travel expenses to receive a specified medical treatment.
7. Interest paid on Student Loans
The CRA lets you claim interest paid on student loans received under the Canada Student Financial Assistance Act, the Canada Student Loans Act and equivalent provincial or territorial programs.
However, you cannot claim interest on personal loans or lines of credit.
Your student loan interest claim can only be used to lower your tax bill and cannot be used to receive a tax refund. Also, you can carry forward student loan interest for up to five years, so it might be wise to save your claim for a year when you have a higher income.
8. Claim Unused Tuition Credits
If you already have children attending post secondary education and their income is too low to efficiently claim this credit, than they can do one of two things:
Carry it forward to another year, up to a max of $5,000
2. Transfer it all or some of the remainder to a designated family member.
For more specifics look at the CRA website info.
9. Claim Child Care Expenses
According to Turbo Tax:
"Canadian taxpayers can claim up to $8,000 per child for children under the age of 7 years at the end of the year.
$5,000 per child for children aged 7 to 16 years.
For disabled, dependent children of any age who qualify for the disability tax credit, the amount to claim for that child is $11,000.
You can claim $5,000 for a disabled child over the age of 16 who does not qualify for the disability tax credit but was still dependent on you and required care.
For a boarding school or overnight camp, you may only claim up to $200 per week for a child under the age of 7 years, $275 per week for an eligible disabled child, or $125 per week for a child aged 7 to 16 years."
For more specifics and about which spouse can make this claim, check out the CRA website.
10. First Time Home Buyers Amount
You can claim up to $5,000 for the purchase of a qualifying home in the year if you or your partner did not live in another home owned by you in the year of acquisition or in any of the four preceding years.
Check out the CRA for more info.
According to Nerd Wallet, there is no need to apply or be approved and this credit results in a $750 rebate on the taxes you owe for the year. (The amount is calculated at the lowest personal tax rate, which is presently 15%.)
Plus check out my 3 part blogpost for First Time Homebuyers if you are starting to think about purchasing a home for the first time: First Time Homebuyers: What do you need to know.
11. Moving Expenses
During the pandemic, many people were buying homes and moving. You may be able to claim moving expenses if:
"If you have moved and established a new home to be employed or run a business at a new location, you can deduct eligible moving expenses from the employment or self-employment income you earned at your new location."
There is a good Q & A section on the CRA website to see if your individual circumstances for moving are eligible as this seems to include very specific circumstances only.
Now Go and Be Intentional in getting your Tax Refund!