As we draw the year to a close, it’s vital to think about tactics that could lower your income tax and boost your tax refund. Thankfully, filing your income tax and benefit return doesn’t need to be intimidating. By utilizing online resources such as TurboTax or H&R Block, decreasing your tax liabilities becomes straightforward.
This guide provides practical tips to help you lower your income tax payable and maximize your income tax and benefit return for 2023. Read on to discover 30 potential ways to pay less income tax in Canada.
1. Take advantage of your Registered Retirement Savings Plan (RRSP)
Maximizing your RRSP contributions is a great way to reduce your taxes, whether you work for an employer or yourself. By contributing to your RRSP, you become eligible for larger tax deductions, which can help reduce your tax payable for the year. This means you can pay lower taxes and keep more of your hard-earned money.
One of the benefits of contributing to your RRSP is that your contributions grow tax-free until you withdraw your money in retirement. This can be a great way to save for the future while also reducing your tax bill. When you withdraw your money in retirement, your income tax rate will likely be much lower, which means your income tax bill should be lower too.
2. Hire a Family Member
Hiring a family member as a self-employed individual can grant access to certain tax benefits. This allows the business to claim payroll expenses on its income, while keeping the income within the family. It is important to note that the family member must be hired under legitimate circumstances and that all relevant tax laws are followed.
3. Deduct Home Office Expenses
To reduce income tax, Canadians can claim home office expenses. The temporary flat rate work-from-home expense claim method applied for taxes from 2020 to 2022. However, the rules have changed for 2023. If eligible, Canadians can claim a percentage of home expenses for select budget lines. Eligible expenses include rent, utilities, internet fees, supplies, long-distance calls, and more. For example, if a Canadian’s net business income is $1,000, and their home office expenses total $1,700, they are eligible to deduct $1,000 against their net business income.
Claiming home office expenses can help lower overall tax burden. It is important to keep accurate records and receipts to support your claim. Canadians should consult with a tax professional to ensure they are claiming the correct expenses and following all tax regulations.
4. Maximize Your Employer Benefits
Most employers offer benefits to their employees, and it is essential to explore all of them and take advantage of the ones that apply to you. For instance, some employers match your RRSP contributions, which can increase your contributions for the year and reduce your income tax payments. However, it is crucial to track your RRSP contribution room for the year, especially if you make personal contributions to a separate registered retirement savings plan.
Apart from pension contributions, other benefits can lead to more money in your pocket. These include health-related benefits or reimbursements, work-from-home benefits, employment relocations, educational and professional development expenses, among others. However, it is important to note that you cannot claim expenses that have already been reimbursed by your employer when filing your income tax and benefit return.
Maximizing your employer benefits can significantly reduce your income tax payments, which can help you save more money. Therefore, it is crucial to explore all the benefits that your employer offers and take advantage of them.
5. Get Tax Credit for Donations
In Canada, taxpayers can receive tax credits for charitable donations made to registered organizations or recognized donees. To qualify for the tax credit, donations must be made by December 31st of the tax year. Taxpayers can also claim eligible donations made by their spouse or common-law partner.
The amount of tax credit that can be claimed is subject to a limit of 75% of the taxpayer’s net income. This limit applies to eligible amounts of gifts.
It’s important to note that the tax savings on eligible donations are non-refundable. This means that the tax credit can only be used to reduce the amount of tax owed. If the taxpayer does not owe any tax, the tax credit for donations made will not be refunded.
Taxpayers who have not claimed the donations tax credit in the past five years can reduce their income tax by claiming eligible donations made in previous years.
6. Contribute to Spousal Registered Retirement Savings Plan (RRSP)
If an individual is unable to contribute to their RRSP, they can contribute to their spouse or common-law partner’s RRSP until they turn 71. However, this reduces the RRSP deduction limit for the tax year. Contributing to a spousal RRSP can enable couples to split income from RRSP withdrawals in retirement, potentially resulting in lower income taxes depending on their income brackets.
7. Deduct Moving Expense
When you move for employment or self-employment purposes, you can claim tax credits on line 21900 of your income tax and benefit return. To calculate your eligible moving expenses, use Form T1-M, Moving Expenses Deduction. Deducting relocation costs can help reduce your taxable income.
As a full-time student, you can also use the moving expense claim to reduce your taxable income. This can be applied against benefits such as research grants, scholarships, fellowships, bursaries, etc. If you move as a result of work, such as a summer work placement, co-op, or to run a business, your related moving expenses can get deducted from your income earned in the new location.
Eligible relocation costs that you can claim include costs for transporting and storing your household items, traveling between locations such as vehicle expenses, travel meals, and accommodation, funding your temporary living expenses for up to 15 days, canceling your old housing lease, changing your home address, replacing driving licenses and other permits, utility setup and disconnections, maintaining your old home such as interests paid, property taxes, and utilities, and selling your old home and buying a new home.
However, some moving expenses may not qualify for a tax credit. For example, costs to forward your mail, clean your home, replace personal items, or look for a job do not qualify. Additionally, you must have moved at least 40 kilometers closer to your new work, business, or school.
It is important to keep all relevant receipts and documents to support your claim. If you have any questions about eligible expenses, consult the CRA website or a tax professional.
8. Claim Child Care Costs
If you incurred child care costs for an eligible child, you can reduce your taxes using the childcare tax credit. An eligible child is considered your child, your spouse’s, or common-law partner’s child who is under the age of 16. If a dependent has an impairment or disability, the age limit is extended.
If a child with a net income of less than $15,000 in 2023 relies on you, your spouse, or common-law partner, they can qualify you for the childcare cost tax credit.
To claim the childcare credit, the dependent must have lived with you or your partner when you incurred the expense. Generally, you may only claim childcare payments made to a Canadian resident in Canada, except in certain situations.
Eligible childcare expenses include caregivers, services at daycare centres and educational institutions, day camps, and day sports schools. Each one must have a primary goal to care for children, including boarding schools or camps with lodging.
To claim these expenses, you can use form T778 Child Care Expenses Deduction and report them on line 21400 of your income tax and benefit return. Depending on your circumstances, you may claim up to $11,000.
Here is a summary of what you need to know to claim child care costs:
- You can claim childcare costs for an eligible child under the age of 16.
- If a dependent has an impairment or disability, the age limit is extended.
- A child with a net income of less than $15,000 in 2023 can qualify you for the childcare cost tax credit.
- The dependent must have lived with you or your partner when you incurred the expense.
- Eligible childcare expenses include caregivers, services at daycare centres and educational institutions, day camps, and day sports schools.
- You can use form T778 Child Care Expenses Deduction and report them on line 21400 of your income tax and benefit return.
- Depending on your circumstances, you may claim up to $11,000.
9. Write off Capital Losses
If you have made capital gains during the year, they will be taxed at an inclusion rate of half of the gains. Capital gains occur when you sell or transfer a property for a price higher than the adjusted cost base of the property. In contrast, capital losses happen when you dispose of assets at a lower price than the adjusted cost base, including any selling costs.
If you incurred a capital loss during the year, you can use it to reduce your capital gains in the same year. Your allowable capital loss will be equal to half of your loss. You can use this to offset any capital gains you have made in the same year, reducing your taxable income. If your capital losses are greater than your capital gains, you can apply the net capital loss to taxable capital gains of the three preceding years and to taxable capital gains in future years.
It is important to note that you cannot claim a capital loss on personal-use property, such as a primary residence, car, or furniture. Additionally, if you sell a property for a loss and repurchase it within 30 days, the loss may be considered a superficial loss and may not be deductible.
10. Use Carried-Over Net Capital Losses
If you have a net capital loss in a given tax year, which means your expenses exceed your income, you can carry it forward to offset capital gains in the future. If your allowable capital loss in a year exceeds your capital gain, it will result in a net capital loss. However, you cannot apply it to your general income in the current tax year if you don’t use it.
To apply your net capital loss to a year other than the year in which you made the loss, you need to fill out a Schedule 3 form for Capital Gains (or Losses) and submit it with your income tax return. You can carry your net capital loss backward to apply it to capital gains as far back as three years. This allows you to reduce your taxable income and pay less income tax.
11. Defer Capital Gains Tax by Claiming a Reserve
If you dispose of a capital property and receive the full payment in a year, you may face a 50% tax on any capital gains you make. However, you can reduce this tax by claiming a capital gains reserve. This strategy works if you want to carry forward gains to a future year, expect to have a lower tax rate, or incur capital income losses.
To claim a capital gains reserve, you must fill and submit Form T2017, Summary of Reserves on Dispositions of Capital Property. You can claim capital reserves for up to four years, except in certain situations. However, you may not qualify to claim the capital reserve in a tax year if you lived outside Canada, were exempt from paying tax at the end of the tax year or at any time in the next year, or sold your capital property to your own corporation.
If you claim a reserve, you still calculate your capital gain for the year as the proceeds of disposition minus the adjusted cost base and the outlays and expenses incurred to sell the property. From this, you deduct the amount of your reserve for the year. The exact steps to claim a capital gains reserve are as follows:
- Complete and file Form T2017 along with your tax return for each year you are claiming the reserve.
- Add to your taxable income the prior year reserve you have claimed, if any.
- Deduct from your taxable income the current year’s capital gains reserve you have calculated.
Claiming less than the maximum capital gains reserve can also reduce your capital gains tax. For instance, if you decided in the year of sale to claim a reserve of only $170,000, then the capital gain after the reserve would be $130,000 ($300,000 – $170,000).
Note that you may be able to claim a capital gains deduction and reduce your taxable income. For more information, see Line 25400 – Capital gains deduction.
12. Claim the Capital Gains Deduction
Individuals who dispose of certain properties may qualify for the cumulative capital gains deduction, which can reduce their taxable capital gains. Eligible properties include qualified small business corporation shares and qualified farm or fishing properties.
To claim the capital gains deduction, individuals must be deemed or actual Canadian residents throughout the year. The deduction gives eligible individuals cumulative lifetime capital gains exemptions (LCGE) against net gains realized when they dispose of qualified property.
For qualified small business corporation shares, the cumulative capital gains exemption limit is $913,630 for 2022 and $971,190 for 2023. As only half of the realized capital gains remains taxable, the deduction limit is $456,815 for 2022 and $485,595 for 2023.
Due to the complexity of the process and the specific requirements, it is recommended to seek the advice of an accountant when claiming the capital gains deduction.
13. Get the Home Buyer’s Credit
Canadian homebuyers making their first purchase may be eligible for the Home Buyer’s Credit, which can provide up to $10,000 in tax savings. To claim this credit, the qualifying home must be registered in the name of the individual or their partner and located in Canada. The home can be an existing home or one under construction, including single-family homes, semi-detached or townhouses, mobile homes, condos, apartments, or shares in co-operative housing that provides an equity interest.
However, shares in co-operative housing that only give the right to tenancy do not qualify for the credit. Additionally, the home must be occupied as the principal place of residence within one year of acquisition. The credit can be claimed in full or split with a spouse or common-law partner.
When filing taxes, claim the credit on Line 31270 for the Home Buyer’s amount. The credit is non-refundable, meaning that it can only reduce taxes owed and cannot result in a refund.
14. File electronically using a tax software
Filing your income tax electronically using certified tax software with NETFILE can result in a faster tax refund, usually within two weeks. The Canada Revenue Agency (CRA) offers a range of free and paid software options for electronic filing. Using software such as TurboTax and H&R Block can reduce your taxes by identifying additional tax credits and deductions.
15. Claim the Canada Workers Benefit (CWB)
To claim the Canada Workers Benefit (CWB), an individual must have turned 19 by December 31 of the applicable tax year. The CWB is a refundable tax credit intended to supplement the earnings of low-income workers. It has two parts: a basic amount and a disability supplement. The basic amount is available to those who earn working income and have a net income below the net income level set for their province or territory of residence. The disability supplement is available to those who are eligible for the Disability Tax Credit.
To apply for the advanced payment of the CWB, an individual can do so via their CRA My Account profile or by filling out Form RC201 by August 31. By claiming the CWB as a basic amount or as a disability supplement, an individual may receive up to half of the benefit in advance.
An individual can claim the CWB electronically or by filling out Schedule 6 if they file a paper tax return. It is important to note that the CWB has replaced the Working Income Tax Benefit (WITB) since 2019.
In addition, EQ Bank offers a Savings Plus Account that provides 3.00% on everyday banking. To qualify for the bonus interest rate, an individual must set up $500/month or more in either direct deposit for their pay or recurring pre-authorized debits. Once set up, they will be eligible for the increased rate of 3.00% for 12 months. Those who have already set up the above automatically qualify for the bonus interest. Conditions apply.
16. Claim Tuition Fees and Other Education Expenses
Individuals can claim education-related expenses such as tuition fees for post-secondary education in Canada. This applies to courses that develop skills for purposes certified by the Minister of Employment and Social Development. If an individual paid fees for an occupational, trade or professional association exam, they may qualify for the tuition tax credit. However, if a federal, provincial or territorial job-training program has reimbursed or covered the tuition, then the individual cannot claim this credit.
17. Maximize your Tax-Free Savings Account (TFSA)
A tax-free savings account (TFSA) is a great tool to grow your income without having to pay taxes on it. Unlike registered retirement savings plans, TFSA contributions do not receive tax deductions. However, you can reduce your income taxes significantly when you grow your income through a tax-free savings account.
To maximize your TFSA, ensure that you have enough contribution room before you contribute. You can check your contribution room on the Canada Revenue Agency (CRA) website. If you contribute more than your contribution room, you will pay a one-percent tax on the excess amount for every month it remains in the account.
Investing in your TFSA can help you grow your income tax-free. Consider investing in a diversified portfolio of stocks, bonds, and mutual funds to maximize your TFSA returns.
18. Claim Interest on Student Loans
On Line 31900 of the income tax return, individuals can claim the interest paid on their student loans. This can be done in the current tax year or for the previous five years for post-secondary education. However, this is only applicable if the loan was received through the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act, or similar provincial or territorial government laws. It is important to note that individuals can only claim interest payments for student loans that they have not previously claimed. Additionally, under certain conditions, individuals can carry forward their claim on interest for student loans for up to five years.
19. File Your Taxes Before the Deadline
Filing your income tax and benefit return before the deadline can help you avoid any fees or penalties. Additionally, filing early can shorten your processing time, which means you can receive your tax refund faster whether you submit your return electronically or on paper. While filing early doesn’t earn you any tax credit or deduction, it’s a smart move to keep more money in your pocket. Be sure to file your taxes before the deadline to avoid any unnecessary fees or penalties.
20. Hire a Tax Professional
When it comes to filing income tax returns, hiring a tax professional or accountant can be beneficial, especially if your income situation is complex. A tax professional can help you identify various tax savings that you may not be aware of as a novice. Although hiring a tax professional comes with a cost, the benefits may outweigh the cost, especially if you have business or property income. If you earn income from self-employment, rental, or investment income, you could claim professional income tax-filing fees. It is essential to conduct a cost-benefit analysis to determine whether hiring a tax professional is worth the expected claim in tax credits and deductions.
21. Take Advantage of the Medical Expense Tax Credit
The medical expense tax credit is available for individuals who have paid significant medical expenses for themselves or their dependents within a tax year. This non-refundable tax credit can be applied to reduce an individual’s Part I tax liability.
To claim the medical expense tax credit, individuals must have eligible medical expenses that exceed the lesser of 3% of their net income or $2,421. Eligible expenses include dental services, hearing aids, hospital services, and many others. Expenses for dependents, such as children, grandchildren, parents, siblings, or other family members who lived in Canada at any time during the year, can also be claimed.
Individuals should keep records of their medical expenses, including bills for services like laser eye surgery, orthodontic work, prescription drugs, and pre- and post-natal treatments, to ensure they can claim all eligible expenses and take advantage of this tax credit.
22. Incorporate Your Business
Incorporating your business can lead to more deductions and lower tax rates. If you do not incorporate your business, your income will be taxed at your personal income tax rate. This can potentially push you into higher tax brackets, resulting in higher income tax payments. By incorporating your business, you can take advantage of the relatively lower corporate tax rate and reduce your tax burden. Additionally, incorporating your business can provide more legal protection and credibility.
23. Coordinate with Your Spouse for Transferred Credits
Tax credits and deductions can be transferred between spouses or common-law partners to reduce taxes for the partner who benefits the most. For example, non-refundable tax credits can be transferred to a spouse, provided the credits are not related to caregiver, education, child care, or other allowable deductions. This can help reduce the overall tax bill for the couple. It is important to coordinate with your spouse to determine the best way to transfer credits and deductions to minimize taxes.
24. Explore Provincial and Territorial Tax Benefits
Besides federal income taxes, Canadians also pay provincial and territorial taxes. These taxes may qualify you for tax credits and deductions unique to your province or territory. For instance, taxpayers in Alberta and Ontario can claim tax credits for adoption and medical expenses, which can reduce their overall tax burden. It is essential to explore the tax benefits offered by your province or territory to maximize your tax return.
25. Claim the Northern Living Tax Allowance
Living in a northern region in Canada comes with the benefit of receiving a tax allowance from the government. This allowance is called the Northern Residents Deduction and can be claimed on line 25500 of your income tax and benefit return. There are two types of deductions available: the residency deduction and the deduction for travel benefits received from employment in a prescribed zone that are reported as income.
To claim the residency deduction, you must have lived in a prescribed zone continuously for at least six consecutive months. There are two claimable amounts for the residency deduction: the basic residency amount and the additional residency amount. The basic residency amount is available to all residents of prescribed zones, while the additional residency amount is available to those who meet certain criteria.
It is important to note that the Northern Residents Deduction can only be claimed by those who have lived in a prescribed northern zone or intermediate zone. If you qualify, make sure to claim this deduction to reduce your taxable income and potentially increase your refund or lower your balance due.
26. Use the Canada Training Credit to reduce your taxes
Students attending eligible educational institutions can benefit from using the Canada Training Credit (CTC) to minimize their tax payable. If you have lived in Canada for the entire year, you can claim the CTC for eligible tuition and educational fees. This applies to anyone aged 26 to 65.
Furthermore, you can claim the CTC if you have a Canada training credit limit (CTCL) for the current year or a reassessment for the previous year. Every Canada Tax Credit claimed reduces your Canada training credit limit for future years.
27. Deduct Union Fees or Professional Dues
If you paid union fees or professional dues related to your employment, you can claim them as eligible employment expenses on your income tax return. The Canada Revenue Agency (CRA) allows you to claim annual dues for membership in a trade union or an association of public servants, as well as professional board dues required by provincial or territorial law. Additionally, you can claim professional or malpractice liability insurance premiums or professional membership dues necessary to maintain a professional status recognized by law. You may also claim parity or advisory committee dues required by provincial or territorial law.
However, you cannot claim expenses for licenses, initiation, special assessments, or any other charges beyond the organization’s ordinary operating costs. It is important to keep accurate records and receipts to support your claims.
28. Claim Carrying Charges and Interest Expenses
When filing your tax return, you can claim carrying charges and interest expenses on certain investments. These include investment management fees for non-registered or tax-sheltered accounts and fees paid for investment advice. Additionally, you can claim interest paid on loans for investments that yield interests and dividends. However, interest rates on loans for assets that only earn capital gains are not eligible for a claim. Other carrying charges that you can claim include legal expenses for child-support payments and professional fees for filing your taxes if you have business or property income. Make sure to keep all relevant documents in case the CRA asks to see them later.
29. Use Exploration and Development Expenses Tax Credit
Canadians who invest in energy stocks and ETFs can use this tax credit if they have invested in energy companies involved in exploration. The tax credit applies to passive investments in petroleum, natural gas, mining, or certain clean energy generation and energy conservation ventures. To claim the tax deduction, the investment should not constitute a normal business operation. The taxpayer must complete and submit Form T1229, Statement of Resource Expenses and Depletion Allowance to claim the tax credit.
30. Deduct Spousal and Child Support Payments
After a separation or divorce, spousal support payments made under a court order can be claimed as a deduction when filing tax returns. However, child-support payments are generally not considered income to the recipient and hence cannot be deducted by the payer. In contrast, spousal-support payments are treated as income to the recipient and can be deducted by the payer if the court order or agreement clearly specifies the amount. It’s important to note that only fully paid outlays can be claimed as deductions.
Key Takeaway
To minimize tax obligations in Canada, it is essential to identify the tax credits and deductions that apply to you and claim them on your tax returns. It is also crucial to keep supporting documentation when claiming these credits and deductions, as the Canada Revenue Agency may request to assess your tax returns in detail. Without proper documentation, you may lose out on tax savings or even owe more if a tax credit or deduction has already been applied.
There are many opportunities to save on taxes in Canada based on the 30 approaches listed in this article. However, it is important to be aware of the conditions and limitations that apply to each tax-saving strategy. For example, some tax credits and deductions have income limits or are only available for specific types of expenses.
Overall, by staying informed and utilizing the available tax-saving strategies, Canadians can reduce their tax obligations and keep more of their hard-earned money.
Frequently Asked Questions
How can I legally reduce my income tax in Ontario?
There are several ways to legally reduce your income tax in Ontario. You can take advantage of tax deductions and credits, such as the RRSP contribution deduction, the medical expense tax credit, and the charitable donation tax credit. You can also split your income with your spouse or common-law partner, invest in tax-efficient investments, and claim business expenses if you are self-employed. It is important to consult with a tax professional to ensure you are taking advantage of all the tax-saving opportunities available to you.
What are some effective ways to decrease my tax burden in Canada?
Some effective ways to decrease your tax burden in Canada include maximizing your RRSP contributions, taking advantage of tax credits and deductions, investing in tax-efficient investments, and splitting your income with your spouse or common-law partner. You can also consider incorporating your business to take advantage of the small business tax rate and other tax benefits. It is important to consult with a tax professional to determine the best strategies for your specific situation.
What are some tax-saving strategies for small business owners in Canada?
Small business owners in Canada can save on taxes by taking advantage of the small business tax rate, claiming business expenses, and investing in tax-efficient investments. They can also consider incorporating their business to take advantage of other tax benefits, such as the lifetime capital gains exemption. It is important to keep accurate records and consult with a tax professional to ensure compliance with all tax laws and regulations.
What is the CRA low income benefit and how can I apply for it?
The CRA low income benefit is a refundable tax credit designed to assist low-income individuals and families. To be eligible, you must have a net income below a certain threshold and meet other criteria. You can apply for the benefit by filing your income tax and benefit return and completing the applicable forms. The amount of the benefit varies depending on your income and family situation.
What is the tax-free amount of income in Canada and how does it work?
The tax-free amount of income in Canada is the basic personal amount, which is the amount of income you can earn before you have to pay federal income tax. In 2023, the basic personal amount is $13,808. The amount is indexed to inflation and may change each year. The tax-free amount is deducted from your total income to determine your taxable income, which is used to calculate your income tax owed.
Who are the highest taxpayers in Canada and how can I avoid being one of them?
The highest taxpayers in Canada are typically high-income earners, such as executives, entrepreneurs, and professionals. To avoid being one of them, you can take advantage of tax-saving strategies, such as maximizing your RRSP contributions, investing in tax-efficient investments, and claiming all available tax credits and deductions. It is important to consult with a tax professional to ensure you are taking advantage of all the tax-saving opportunities available to you.
