|Table of Contents|
|Pay household Expenses through the higher income spouse.||1|
|If your dependant is ill, claim a higher deduction.||2|
|Claim Child Care Expenses||3|
|Pay your older (above 18) child wages for babysitting the younger ones.||4|
|Claim deductions for your university child's education and textbooks.||5|
|Make use of a Tax Free Savings Account||6|
|Minimize Capital Gains Tax||7|
|Protect income with an exempt life insurance policy||8|
|Invest in Real Estate jointly with your Spouse||9|
|Invest in high risk flow-through shares and receive higher deductions||10|
|Claim Deductions for Health & Dental Costs:||11|
|Hire a Co-op Student||12|
|Pay your partner (spouse) a director's fee||13|
|Incorporate your business (Self-employed)||14|
|Use your corporation to buy a home.||15|
|Home Office can be used to Maximize the Deductions||16|
|If your car is being used for business purposes, claim all deductions.||17|
|Income splitting through a family trust||18|
|Quick Method for Accounting for HST||19|
|Advantages of hiring your spouse if you are a medical practitioner.||20|
If there is a difference in the income tax brackets that you and your spouse are in, then the mentioned tax saving strategy is ideal. This definitive and simple tactic calls for the higher income spouse to pay for the majority of the household expenses. This way the lower income spouse will be able to use his or her income for investment purposes. Since the funds tied up in the investments belong to the lower income spouse, the marginal tax rate (lower) applied to those investments will correspond to the lower income spouse as well. Hence by using the lower income spouse to invest you are savings tons of money you would have originally given in the form of taxes.
Let's consider an example –
John and Jane are a married couple. John earns $135,000 a year while Jane earns $30,000. Jane saves $20,000 and invests that total amount which later increases by 50% (a value of $10,000). Her total taxable income is now $40,000 for the year. Since she has a much total lower income, her marginal tax rate is only 24.1% and her after-tax income is $34,108.
Now let's reverse the scenario and John is the one who is investing the $20,000 with the $10,000 in profit. His total taxable income for the year is now $145,000, since he has a much higher income he is subject to a marginal tax rate of 46.4% and his after-tax income is $98,567.
So in this situation, Jane should be the one investing since her investment profits will be taxed at the much lower marginal rate due to her initial low total taxable income. This will save John approximately $5,361 in taxes. (Please note that this example is based on the Federal and Ontario Provincial tax rates for the 2013 tax ation year).
Under the Income Tax Act, those paying taxes have the right to claim a higher deduction if their dependent is unwell in a manner specified under the Act. A specific set of symptoms and ailments, including neurological diseases and certain disorders etc, specified, give way for this higher deduction claim. This deduction claim is raised further if the one suffering is a senior citizen.
A few further conditions apply; the patient is not allowed to claim deductions on a separate basis and has not, or will not be reimbursed for their illness by an employer, insurance company or a third party. Furthermore if the one paying the taxes has received only a certain amount as compensation, the balance can still be claimed.
Did you know that the money you spend on your young child can be reimbursed to a large extent? Luckily childcare expenses are tax deductible. However, the lower income spouse is entitled to these claims only.
Childcare expenses include the following:
There is a cap on the total deductible amount that can be claimed. For children born in 2004 and later, the maximum deductible amount for child care expenses is $7,000 per child. For children born between 1994 and 2003, the maximum deductible amount for child care expenses is $4,000 per child.
Paying your adult child money, for babysitting your under 16's, makes room for a tax saving opportunity. This tactic will allow you to claim a tax deduction for fees paid to your older child (16 or older) for babysitting your younger child. Childcare expenses, which include babysitting fees, are tax deductible.
Another advantage of this strategy is income splitting. The payments you are making to your older child will be included in his/her income for tax purposes. There is a high probability that the tax he/she would be paying on this income would be a negligible amount.
Another favorable aspect of this situation is that your child who is now earning income will be entitled to RRSP contribution room. Hence, this minor form of income splitting results in a beneficial situation for the whole family, in terms of beating the tax man.
Whether you are a college student or a university student, you can make some important claims. Full time students can claim around 65 dollars a month, just for text books and if you are a part time student that number drops to 20 dollars a month. However text book amounts are not the only aspects of education that entitle you to a claim.
As a university or college student, you are also entitled to a 400 dollar amount (full time) monthly or a 120 dollar monthly amount (part time). Best of all, any unused portion of their tax credits can be transferred to a parent, grandparent, spouse or common-law partner.
This can prove to be surprisingly rewarding just by simply being aware of all of the potential claims that you and your family are entitled to.
Since the last couple of years, Canadians were given the wonderful option of a Tax Free Savings Account. To open up a TFSA you must:
You should consider contributing to a TFSA because:
Let's consider an example for TFSAs, RRSPs and Non-Registered Bank Accounts – John has $20,000 which he wants to invest into bonds. He has three options to hold these bonds, TFSAs, RRSPs and Non-Registered Bank Accounts with each giving him an annual compounded 5% rate of return. He plans on contributing for a 20 year term. His marginal tax rate is also 46.4%.
If he invests that amount into a TFSA, his accrued interest income over 20 years would be $33,066, thereby increasing the total value of his account to $53,066. When he withdraws this total amount, it would be completely tax free.
To calculate the after-tax value of money invested into a RRSP 20 years from now, we have to add the sum of:
a) Tax savings realized from making the RRSP contribution
b) Value of RRSP withdrawals after paying income tax on the amounts withdrawan
A) Tax Savings from Making RRSP Contribution
When he invests $20,000 into RRSPs, he initially gets a tax savings of $9,280, because RRSP contributions are tax deductible. He can use the tax savings for an additional side investment outside the RRSP. Based on a 5% (pre-tax) rate of return, the reinvested tax savings of $9,280 will grow to $19,118 (after-tax) over the twenty year period.
B) Value of Initial Investment of $20,000 after 20 years
The return on his initial RRSP investment of $20,000 would provide him with $53,065 after 20 years, if he keeps the money saved inside a RRSP. However, when he withdraws this amount he will pay tax at his marginal tax rate of 46.4% ($24,622), which would leave him with only $28,433.
Luckily, he also has that side investment and when added will provide him with $47,551 overall. Non-registered bank account
For a non-registered savings account, his after tax interest rate is 3.68% (i.e. 5% less taxes). After 20
As seen in the graph, TFSAs are the best options without taking other variables into consideration. This is primarily because the interest income is tax free upon withdrawal.
However, there is a limit on the amount you can deposit into a TFSA based on your “contribution room”. Initially when the TFSA was first introduced in 2009, it had an annual contribution room of $5000 and was indexed to inflation. To adjust for inflation, the annual contribution room was increased to $5,500 for the 2013/2014 year. So if you have been over 18 and a resident of Canada since 2009, you can contribute up to $31,000 to a TFSA if you have had no previous contributions.
There are a few simple ways to minimize capital gains tax.
The first is by contributing funds from the sale of a property such as land, buildings, shares of public companies or even a second home to a RRSP. The funds contributed towards an RRSP can drastically reduce your total taxable income.
The second way to reduce capital gains tax is by claiming a capital gains reserve. If you sell a property and you don't receive all of the proceeds right away, you are also entitled to a capital gains reserve which lets you defer payment on your total capital gains tax.
Another method is to apply your capital losses against your capital gains to reduce your total net capital gains. If you have some investments that have dropped in value, consider selling them so that you can apply them to your gains.
After deliberation with your financial advisor, consider using your life insurance policy as an investment strategy. Many life insurance policies today, follow the exemption rule. An exempt policy, allows a portion of the amount you pay as a premium to be deposited in a pool of investments that are increasing, to be free from tax. This amount, along with the face value of the insurance policy can then be handed to your offspring or successor upon death. You could use this tax free pool of funds during your lifetime, as collateral when borrowing funds.
Investing in real estate collectively with your spouse is a form of effective income splitting. Purchasing a house and then renting the property out will generate profits. Splitting that purchase with your spouse will result in a fifty/fifty split of the profits as well. Hence the amount of profits will not increase the amount of income earned for just one partner. It will be evenly distributed amongst the two. Tax wise, it is smarter to split the amount as joint owners. It will cut down the amount of tax your family has to pay.
Flow through shares are designed in a way that they give investors a large amount of tax deductions, which are equal to, or almost as much as the original amount invested. The shares that you have invested in, allow tax deductions to be "flown" through the owner of the shares. The company issuing the flow through shares can renounce their expenses for the current in favor of the owner of the shares so that the owner can claim those expenses on his/her tax return.
In essence, by being able to deduct the full value of the initial investment (or close to it) on these special kind of shares, investors are able to earn back a sizeable portion of what they initially invested.
Your business can pay health and dental premiums to your insurance company, for you and your employees. If your business is your primary source of income and you are actively involved in running it, then you are eligible to receive a deduction. A deduction is a claim that can be made to reduce your taxable income. It helps reduce your tax bill.
However as the owner of the business, you must provide your employees the same health and dental benefits that you and your family are currently receiving. However these benefits have to reasonable. In the case that you do not have any employees, you must make sure that the health and dental benefits are once again of a reasonable amount, an amount similar to what you would receive if working for a third party.
If your business decides to hire a Co-op student or an apprentice, you can claim a tax credit.
A tax credit is different from a deduction. Receiving a tax credit will also reduce your tax bill but not by reducing your taxable income. It directly reduces your provincial and federal tax bill (dollar for dollar). As a business, you are entitled to receiving a tax credit of up to 25% on salaries paid to Co-op students. There is a cap on the actual amount you can receive annually per coop student, usually around 3000 Canadian dollars per placement.
Through this tactic you can get reimbursed to a larger extent and benefit greatly as well, through the skills of the apprentice or co op student.
A director of a corporation helps oversee the management of your company. A director's managerial activities include the following:
There is a fee associated with the performance of these services. It is called the director's fee and is paid directly to the director by the corporation.
How is this relevant as taxHow is this relevant as tax saving strategy? Appoint your spouse as the director and ask him or her to perform the relevant services for your corporation. Then pay him or her, the appropriate fee that will be added to his or her income. If your spouse is in a lower income bracket, he or she will not be taxed heavily on the fee she received from the corporation. In terms of saving taxes from the corporation's side, the director's fee is tax deductible for your corporation as well, reducing the amount your company has to pay in tax.
If you are self employed, running your own business, and want to reduce your neverending outflow of money in the form of taxes, consider incorporation. By legally incorporating your business, you are automatically reducing your currently soaring tax rate.
An incorporated business's profits are only subject to a tax rate of 15.5 %, if the business is controlled / owned by a Canadian. However, in the event that you are a self employed owner without an incorporated business, the profits of your business are being added to your personal income. That important addition increases your taxable income by a significant amount, potentially landing you in the highest income bracket. The tax rate of the highest income bracket in Ontario, Canada is at a 49.53 %. So you can save up to 33% in taxes by incorporating, because of the difference in the rate of tax between an incorporated company and a business that has not been incorporated.
This is one of the most effective tax strategies to cut down on the amount you pay as taxes. If you haven't incorporated your business yet, speak to an experienced accountant immediately.
Instead of using your personal income to purchase a home, use your corporation to make the investment. How? Use an Employee Home Purchase Loan.
Hence after following the steps above you can easily use an Employee Home Purchase Loan and save!
As with any tax saving strategy, you should consult with your accountant before proceeding.
Are you a small business owner working from home? If yes, then consider claiming a tax deduction for a portion of your house costs.
If your self-employment meets one of these criteria or both, you are allowed to start deducting your home office expenses:
The following deductions can be made in respect of your home:
Only a percentage of the above expenses can be claimed as a tax deduction. That percentage is equal to the size of your home office compared to the size of your home. For example, if your home office makes up 20% of the square footage of your home, then only 20% of your house costs can be claimed.
It is important to maximize your deductions as much as possible, so consider the following tip:
Car expenses can be deducted to reduce your business income.
The following is a list of claimable Automobile Expenses:
You can only deduct the portion of your car expenses that relate to driving for business purposes. For example, if your business mileage is 80% of the total amount that you drove your car in the year, then only 80% of your car expenses can be deducted for that year.
Tip: In order to save more, keep your old car, you are more likely to have repair costs which will help in more deductions from annual taxes as compared to new car with minimal (if any) repairs.
Tip:Keep a log book to track your business mileage.
The Quick Method is available for small businesses, and is a simplified way of calculating net sales tax for HST purposes. The major advantage to small business owners is reduced paperwork and easier calculations. This method is available for a small business with annual revenue less than $400,000
How this method works is you will charge your clients 13% HST on sales. If your business meets CRA requirement of less than $400,000 annual revenue you are only required to remit 8.8%.
Example: John has business revenue of $100,000 during the year. He applies 13% HST to all orders. Thus John will have collected $13,000 ($100,000 x 13%) but only has to remit $9,944($113,000 x 8.8%).
The CRA is compensating business owners like John (indirectly through the Quick Method) for HST they paid on business purchases. The portion of the HST that business owners keep though the quick method helps cover their HST loss on business purchases.
Medical Practitioners such as doctors, physicians, chiropractors, dentists, pharmacists can take advantage of many tax tips available to performed them. The most common form of tax savings is through income splitting. Medical practitioners can hire their spouses and/or children and pay them a salary. This will allow some of the income earned in your business to be taxed at a lower marginal tax rate if your spouse or children have no other or very little income. Important to note that the work must actually be performed and documentation must be kept. As well, pay should be an accurate representation of work your spouse or child actually.
Another form of income splitting is making your spouse and/or Children partial owners in your Professional Corporation. By doing this you can transfer down dividends to each member elevating some of the tax burden. When combined with tax tip 18 you can potentially pay no tax when the dividend is flowed through a family trust. Only the following Qualified Medical practitioners can become shareholders in Medical Professional corporations:
For family members of physicians and dentists, they can become shareholders, as long as they own non-voting shares.
TIP: Dividends paid to children under the age of 18 will be subject to a “kiddie tax” and included in the owners taxable income at the highest marginal tax rate.