How Do I Save Tax in Canada?

Allan Madan, CA
 Oct 25, 2010
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How do I save on tax in Canada? This is the million dollar question that everyone wants an answer to.

Fortunately, as an Accountant in Oakville and Tax Expert in Oakville, I know of many ways to save tax in Canada, which are described in detail below.

Incorporating your Small Business – How do I Save Tax in Canada – Accountant Oakville

The first way to save tax in Canada is by incorporating your small business. Small business corporations have a very low tax rate of only 16.5%. Compare that to an individual, who in the highest marginal tax bracket is paying 46.4% in taxes.

“You can save approximately 30% in taxes by incorporating in Canada”, says Accountant Oakville, Allan Madan.

Write off Business Expenses – How do I Save Tax in Canada – Accountants in Oakville

The second way to save taxes in Canada is by writing off business expenses. Business expenses include, but are not limited to:

  •   Home office expenses
  •   Car expenses
  •   Supplies
  •   Inventory purchases
  •   Payroll
  •   Telephone and internet
  •   Rent
  •   Advertising
  •   Accounting and legal fees

The general test for deducting business expenses is as follows: “Any expense incurred for the purpose of earning income from a business, and as long as that expense is reasonable, is tax deductible.” This is directly from the Income Tax Act in Canada.

So let’s break the general test down into two components.

The first part of the general test is the purpose test. For an expense to be deductible, it must have a business purpose. For example, if you travel to Florida with your kids and spouse on a family vacation, then the travel costs incurred are non-deductible, because they do not have a business purpose.

However, if you attend a conference in Florida, because it is necessary for your business, then the costs related to the conference, including your travel costs, would be tax deductible.

The second component of the general test is the reasonability test. For a business expense to be deductible, it must be reasonable. For example, if you hire your niece or nephew to file papers or perform data-entry, you can’t pay him or her $50/ hr because that wouldn’t be reasonable, and the CRA would disallow the expense. A reasonable expense for that type of work would perhaps be $10/ hr or minimum wage.

“I equate the General Test for tax deductions in Canada, to the smell test. That is, if an expense doesn’t pass the smell test, it’s probably non-deductible,” says Allan Madan, Accountants in Oakville.

For more information on what your company can deduct, check out Tax-Write offs for a Small Business in Canada.

Setting up Family Trust – How do I Save Tax in Canada – Accountants Oakville

“The third way to save taxes in Canada is by setting up a family trust,” says Allan Madan, Accountants Oakville.

A family trust can hold shares in a private company, real estate, stocks, bonds and other assets.

A major benefit of a family trust is that the future growth in the assets held by the family trust accrues to the beneficiaries of the trust. Beneficiaries are typically your family members.

“The second major benefit is that you can achieve income splitting with family members through the use of the family trust,” according to Allan Madan, Accountants Oakville. For example, dividends, income from real estate and other investment income paid to a family trust can be distributed to the beneficiaries of the family trust, including your children and spouse.

RRSP and TFSA – How do I Save Tax in Canada – Accountants in Oakville

The fourth way to save taxes in Canada is through the use of RRSPs and TFSAs.

“I advocate using both RRSPs and TFSAs, because they each have their own distinct benefits,” says Allan Madan, Accountants in Oakville.

The major benefit of a RRSP is that any contributions made to a RRSP are tax deductible from your income. The second benefit is that any income or gains generated inside a RRSP are not subject to tax whatsoever.

A TFSA can be used for a short-term savings in a tax efficient manner. The reason being is that any withdrawals from a TFSA are not taxable to you.

For example you could use a TFSA to save for a family vacation, and earn income inside the TFSA tax free. When it comes time to pay for the family vacation, the funds withdrawn from the TFSA would not be subject to tax.

Buying Tax-Efficient Investments – How do I Save Tax in Canada – Accountants in Oakville

“The fifth way to save tax in Canada is by buying tax-efficient investments,” says Allan Madan, Accountants in Oakville.

Whether you are a passive investor or an active investor, this is important for you. Some investments have a much higher tax rate than others.

For example, interest is taxed very heavily at 46.4% (the highest marginal tax rate). Whereas eligible dividends are taxed at a rate of 25% and return of capital results in no tax.

So when choosing your investment products, you should speak with Accountants in Oakville or your financial adviser to discuss the tax features of those investments, as it can have a huge impact on your long-term investment gains and the size of your retirement portfolio.

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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Comments 8

  1. I travel from New Brunswick to Alberta to work a 14 day on and 14 day off rotational shift, flying both ways and paying hotels and meals along the way. Am I able to claim any of this on my income tax return? I am an employee and do not have an incorporated business.

    Thanks
    Chris

    1. Hi Chris,

      You can claim traveling expenses as a tax deduction on your tax return, if you meet the following conditions:

      1) You are required to pay for your own travel costs as a condition of your employment
      2) You did not get reimbursed by your employer for the travel costs, or receive a non-taxable travel allowance from your employer
      3) Your employer has completed form T2200, Declaration of Conditions of Employment
      4) As part of your job, you regularly have to travel away from your employer’s office to different places

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  2. I know that the lower income earner can deduct childcare expenses in Canada, but my question is this: If I borrow money to pay te childcare expenses, can I deduct the interest too?

    1. Hi Denny,

      Interest on loans are only deductible when the borrowed funds are used to generate income. Unfortunately, borrowed money to pay child care expenses are not deductible.

  3. i have to travel to the city every day for work, can i claim tax back on my mileage?
    it takes 1hr there and 1hr back, so i would be traveling to and from work, not sure if this is counted for tax return

    1. Hi Jilian,

      No, the CRA does not allow commuting as part of employment expense.

      If you were required to travel because of your work to a client’s site or to vendors, then those would be considered employment expense.

  4. If I make a loan amounting to 10,000 cad @ 4.5% and used the proceeds to buy blue chips stocks can I used the interest as a deduction to my income.

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