5 Tips on How to Save Income Tax in Canada

Allan Madan, CA
 May 16, 2018
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Are you a Canadian looking for strategic ways to save money on your income tax? Keep reading to find out five effective tips that you should be utilizing right now.

Maximize RRSPs

  1. Maximize RRSPs

Make a contribution each year to your RRSP (Registered Retirement Savings Plan) to the maximum amount allowed (i.e. RRSP limit) for the year.  Your RRSP limit for the current year (2018) is shown on your 2017 Notice of Assessment.

RRSP contributions are tax deductible, and any income and gains earned inside a RRSP are not taxable.  This allows for tax savings upon fili­ng your personal tax return, and tax-free growth of your retirement savings.  Follow this strategy, and watch you RRSP portfolio grow overtime.

Tip: 
Do not over contribute to your RRSP. In other words, your contributions should not exceed your RRSP Limit.  Over contributions are subject to a 1% monthly penalty for each month that the over contribution remains in the RRSP. To learn more about RRSP over contribution, read “What Happens if I Over Contribute to my RRSP Savings Account”.

Deduct Employment Expenses on Your Personal Taxes

  1. Deduct Employment Expenses on Your Personal Taxes

Employees are allowed to claim certain employment related expenses as tax deductions on their personal tax return.  These include home office expenses, supplies, and vehicle expenses, just to name a few.  In order to claim employment expenses, you must obtain a completed form T2200 (Declaration of Conditions of Employment) from your employer.  This form does not need to be submitted to the CRA, but must be made available in case the CRA audits you.  Additionally, employment expenses are deductible only if you are required to pay for them as a condition of your employment, and you are not reimbursed by your employer.

Borrow Money to Invest

  1. Borrow Money to Invest

Borrow money to make investments in the stock market.  With prudent investing and sound financial advice, your stock portfolio should grow overtime.  Think of borrowing for investments as an energy bar for your stock portfolio – it gives it a much needed to boost.  By borrowing to invest, you are increasing your buying power, and stock portfolio size.

From a tax perspective, interest paid on money borrowed to purchase stocks, bonds and mutual funds is tax deductible.  This will increase your tax savings.

Buy a Home Tax-Free with the Home Buyers Plan

  1. Buy a Home Tax-Free with the Home Buyers Plan

Most first time buyers are unaware that they can access part of their RRSP savings to purchase a home without having to pay tax on the RRSP funds withdrawn for the purpose of making a down payment.  This strategy is called the “Home Buyers Plan”.  The maximum amount that an individual can borrow from his/her RRSP to purchase their first home is $25,000.  Notice the word “borrow”, this means that the amount withdrawn from your RRSP has to be repaid to your RRSP over 15 years, in equally yearly payments.  The mandatory yearly repayment begins the 2nd year after the year during which you purchase your home.

For example, assume that you and your spouse each borrow $25,000 from your RRSPs pursuant to the home buyers plan to purchase your first home.  Collectively, you will be able to access $50,000 tax-free to use toward a down payment.  In this example, the minimum repayment amount will be $1,667 each year for 15 years, until the balance of $25,000 is fully repaid.

To find out more tax advice as a first time home buyer, read “Money Saving Strategies for First Time Home Buyers and Owners”.

Claim your Medical Expenses

  1. Claim your Medical Expenses

You can get a tax credit upon filing your tax return for medical expenses paid in the year.  Qualifying medical expenses include payments made to a medical practitioner, prescription drugs, certain medical devices, and medical premiums paid to an insurance company for medical benefits.  Keep all of your medical receipts, as the CRA may ask to see them in the event of an audit.

Note:
Not every dollar that you spend on medical expenses qualifies for a tax credit.  There is minimum dollar amount over which medical expenses can be claimed.  This minimum dollar amount or “threshold” is calculated as the lower of:

  • 3% of your net income, OR
  • $2,268

For example, assume that your net income is $50,000 for the year, and you spent $2,000 on medical expenses.  Therefore, you would only be able to claim $500 of medical expenses for the purposes of the medical expense tax credit:

  • Amount spent on Medical Expenses
  • Lower Limit
  • Allowable Amount
  • Tax rate
  • Tax credit
$2,000
($1,500)*
$500
x 20%
$100

* 3% x $50,000

The tax credit that you claim against your taxes payable is $100 based on $2,000 spent on medical expenses in the 2017 year.

Tip:
To maximize the amount that you claim, combine the medical expenses for you, your spouse, and dependents on one family member’s tax return.

By essentially following these five tax tips, you can save money by using them to your benefit. If you would like to see more free tax advice and resources, please click here.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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