Saving Taxes for Canadians

Here are just 5 ways to beat the taxman.

1. Use the power of leverage to create wealth and minimize tax

“Leveraging” is a term for using borrowed money to increase the return on an investment.

For example, assume that you would like to purchase a rental property for $200,000 but only have $40,000 to invest. Furthermore, assume that you can earn $800 per month from the rental property after paying for expenses such as interest, property taxes, insurance, maintenance, etc.

By borrowing $160,000 from a bank, you could purchase the rental property and earn $800/month on your $40,000 investment, which represents a whopping 18% rate of return. This was only made possible by using a leverage.

“Leverage an effective way to multiply your profits, by using other people’s money,” says Allan madan, owner of an accounting firm in Toronto

Before undertaking this strategy, please consult with a accounting professional.

2. Know your RRSP Contribution Limit and contribute the maximum

Your RRSP limit represents the maximum amount that you can contribute to your RRSP in a year. Your current year’s RRSP limit can be found on your most recent Notice of Assessment.

RRSP’s are a great tax savings strategy, because contributions made to a RRSP are tax deductible and any income generated within a RRSP is not taxable. Therefore, contributing the maximum amount allowed to your RRSP each year, you will have maximized your potential tax deductions and maximized your savings.

The power of RRSPs can easily be demonstrated through a practical example.

Assume that you have a tax rate of 40%, your RRSP limit is $6,000 each year and you expect to earn about 6%/year on your investments over a 20 year period.

Scenario 1 – Contribute $6,000 annually to RRSP’s – TOTAL $327,520

By contributing $6,000 each year for 20 years, you will have saved a total of $327,520. Of the $327,520, the amount saved as a result of tax deductions is a staggering $93,568.

Scenario 2 – Contribute $6,000 annually to non-registered investments – TOTAL $177,606

If you contribute $6,000 each year for 20 years to non-registered investments (i.e. outside of your RRSP), then you will have saved $177,606 after-tax.

By comparison, maximizing your RRSP contributions would have resulted in almost $150,000 more, because RRSPs are a tax-sheltered investment and since RRSP contributions offer dollar-for-dollar tax deductions.

Scenario 3 – Contribute $3,000 annually to RRSP’s – TOTAL $163,760

If you only use half of your RRSP limit by contributing $3,000 each year, then you will have saved $163,760 within 20 years. This is exactly 50% less than what you would have had by maximizing your RRSP contributions each year. The lesson learned is that it pays to be a saver.

You should regularly discuss your retirement savings plan with both your financial advisor and professionals at an accounting firm.

For additional RRSP strategies, please see my article on 5 Secrets to Saving Taxes for Canadians.

3. Pay your adult child to babysit and get a tax deduction

Consider paying your adult child who is 18 years old or older to babysit their sibling who is 16 or younger. By doing so, you will receive a child care expense deduction on your personal tax return for the amount paid to your adult child. In addition, your adult child will likely not have to pay any tax on the babysitting income earned, since the first $10,822 of annual earnings is tax-free.

As a Chartered Accountant firm in Toronto, we have recommended this strategy to many of our clients.

4. Multiply the principal residence exemption to 2 or more properties

A lot of Canadians own more than one real estate property. While that’s great, it creates a tax problem because you can only claim the principal residence exemption on 1 property. (By way of background, the principal residence exemption means that you do not have to pay tax on the profit on the sale of your home, in which you live.)

However, you can multiply the principal residence exemption to 2 or more properties. This strategy entails transferring ownership of one of your properties to an adult child (18 years or older) either directly or through a trust.

Each person who is 18 years or older is entitled to claim the principal residence exemption. Therefore, if your adult child sells a property that you have transferred to him, he/she can claim the principal residence exemption and won’t pay a cent in tax.

5. Deduct all employment expenses that the CRA allows

If you are an employee, make sure that you take advantage of all tax deductions that the CRA allows specifically for employees:

1. Cost of supplies
2. Salary paid to an assistant
3. Home office expenses, if you work from home
4. Rent paid for an office
5. Union and professional dues
6. Legal fees

In order to qualify for these deductions you must have paid for the expenses, and your employer has to complete and sign Form T2200, Declaration of Conditions of Employment.

Speak with your Accounting advisor in Toronto to see if you’re claiming all of the employee tax deductions available.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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