An old idiom goes, “a penny saved is as good as a penny earned.” Tax planning is one method for lowering your tax bill while increasing your income.

Everybody except accountants despises taxes, but they are an unavoidable reality. The rules are constantly changing, and the odds may get stacked against the honest taxpayer. But don’t worry; there are still simple ways for Canadians to reduce their tax liability. In this blog, we’ll look at a few of them.

IMPORTANT TAKEAWAYS

If you live or earn money in Canada, you must pay income tax, just like everyone else.

If you know the current regulations and can benefit from them, Canadian tax law allows for several ways to reduce your tax liability.

Contributing to a deducting interest and retirement plan, taking advantage of small business credits can benefit. When in suspicion, confer a professional accountant.

Borrow to Invest, Save to Buy

The days of debt-free living are long gone, and almost everyone in the country is in some debt. Surprisingly, the right kind of debt can help you make a dent in your tax bill. A credit card debt or car loan incurred to purchase that new sofa you’ve had your eye on is not the right kind of debt. A loan used to buy an investment is known as gearing.

It is because the interest on loans used for investing is tax-deductible. The interest on anything else you borrow to buy is not. Therefore, it is preferable to use cash or savings for these discretionary purchases from a tax standpoint and then borrow to invest rather than the reverse. However, no debt is the best kind of debt for your finances.

Taxes and Investments

Stocks, for example, receive preferential tax treatment on dividends and capital gains, whereas other fixed-income investments do not. As a result, holding your money in taxable fixed-income investments may cost you money, depending on your tax bill and inflation rate. If you have tax-protected retirement and income portfolios, consider keeping a smaller percentage of your fixed-income investments in the taxable portfolio.

Marriage Sleights – Income splitting with your spouse or contributing to their retirement account can sustain you save funds on taxes, especially if your incomes are significantly different. However, professional assistance will be required to structure contributions in a way that will withstand an audit.

Start a Business – When you own a business, you can deduct expenses that you incur to help you earn money. These could include using your car for business purposes, your home office, salaries paid to your children, and any supplies you use to provide goods or services. This advice gets frequently given as a way to save money on taxes. While it is true that having a side business can help you save money on taxes, it is not for everyone. Farmers, for example, benefit from some of the most generous tax breaks available, but they rarely make enough money to benefit from them genuinely. Creating a business that loses money will harm your overall financial situation more than paying taxes. If you have a business plan that indicates you will make a profit, go for it. If not, consider a different approach.

Questions that may help to clear your doubts

  1. How Does income tax work in Canada?

The tax system in Canada is graduated, which means that the more you earn, the more you pay. This system divides money into income brackets, determining the applicable tax rate. A common misconception is that all income gets taxed at the highest tax bracket rate.

  1. What Can You Claim On the Tax Return?

Nonrefundable tax deductions reduce your taxable income, and can be deducted from your tax due. The refundable tax credit results in a refund.

The following are some of the deductions and credits available

Non-Refundable Tax Credits

The Bottom Line

It can be challenging to track which write-offs apply to your situation. However, finding the right accountant is the most critical step for most people in lowering their taxes. All of the strategies mentioned above are legal, but your accountant will be able to look over your finances and tell you which ones are viable. Be sure to stay on top of your tax situation so that you can fully utilize your accountant’s expertise.