As an accountant in Toronto and tax expert in the region, I am focused on saving taxes for Canadians – individuals and business owners.
Here is just a sample of secrets to saving taxes for Canadians, which the Canada Revenue Agency (CRA) doesn’t want you to know:
1. Contribute to spousal RRSP’s to equalize retirement income
The major benefit of contributing to your spouse’s RRSP, in addition to your own, is to end up with the same amount invested in RRSP’s as your spouse upon retirement. This will result in tax savings upon retirement. Not only that but you will avoid over-contributing and its associated penalties.
A spousal RRSP is a special type of RRSP where the contributing spouse receives a tax deduction for amounts contribute to his spouse’s RRSP. The money contributed to a spousal RRSP does not belong to the contributing spouse, but is legally owned by the recipient spouse.
In addition, the maximum amount that can be contributed to a spousal RRSP is based on the contributing spouse’s RRSP Limit.
“Spousal RRSP’s, which are an excellent retirement and tax savings vehicle, are often overlooked by Canadians” – Allan Madan, accountant in the Greater Toronto Area
For example, take the case of Charlie and Susan, who are a married couple. Charlie earns $130,000 per year, while Susan is a homemaker. Further assume that the long term rate of return on Charlie’s and Susan’s RRSP’s is 6%.
If Charlie contributes $500 each month for 30 years to only his RRSP, he will have saved a total of $502,258. While that sounds great, it will create a tax problem for Charlie and Susan, especially if Susan has a negligible amount in her RRSP’s. The reason being is that any funds withdrawn from Charlie’s RRSP upon retirement will be included in Charlie’s taxable income, resulting in a significant amount of tax for Charlie and no tax for Sue.
Had Charlie consulted with his accountant in Toronto, Charlie would have known to contribute $250 per month to his RRSP and $250 to his Spouse’s RRSP (i.e. spousal RRSP). By doing so, both Charlie and Susan would end up with a total of $251,129 in each of their RRSP’s in 30 years. Upon retirement, both Sue and Charlie can withdraw funds from their own RRSP’s. This would result in lower taxes when compared to the previous example where only Charlie withdrew funds from his RRSP.
2. Dispute your assessment
After you file your personal income tax return, you will receive a Notice of Assessment from the CRA that will show whether the CRA has assessed your return as you filed it, or if they disagree and have made changes.
For example, you may claim a tax deduction or a tax credit on your personal tax return, which the CRA disallows upon processing your return. This would be reflected on your Notice of Assessment.
If you receive an unfavourable Notice of Assessment, don’t just accept it! Instead, ask your local accountant to file a Notice of Objection with the CRA to dispute the assessment. The Notice of Objection must be sent within 90 days from the date of the original Notice of Assessment.
You’ll be surprised how a savvy accountant can successfully challenge the CRA!
3. 100% Tax Deductible Investments
The CRA offers special tax benefits for purchasing flow through shares, which you should take advantage of to save tax.
Flow-through shares are shares in mining, oil and gas, and renewable energy companies whose main business is exploration and development.
These companies transfer, or “flow-through”, their resource expenses to the owners of flow-through shares, instead of deducting these expenses themselves.
An owner of flow-through shares can deduct the transferred resource expenses on his/her personal tax return. Usually, the resource expenses transferred are the same the amount as the cost of your investment in the flow-through shares.
For example, assume that you reside in Toronto, Canada and have purchased $10,000 of flow through shares in a mining company. Further assume that the mining company transfers resource expenses to you in the amount of $3,000 in the first year, $4,000 in the second year and $3,000 in the third year.
As a result, your taxes payable will be reduced by $4,640 (i.e. $10,000 x 46.4% tax rate) over a 3 year period. In addition, you will be entitled to Federal and Ontario tax credits for $1,500 and $500 respectively. The total tax benefits alone amount to $6,640!
Even if the flow through shares don’t increase in value, you’ll end up with $16,640 (i.e. $10,000 + $6,640), which represents a 66% return on investment.
Note that the prices of flow-through shares can be very volatile, so it’s important that you consult with a financial advisor and accountant in the Toronto region before purchasing such shares.
4. Contribute to your RRSP’s before paying off your mortgage
“In most cases, you’ll be better off by using your extra cash to invest in a RRSP, rather than paying down your mortgage faster” – Allan Madan, accountant in the Greater Toronto Area.
Let’s take the example of Sue. Sue has a $100,000 mortgage, with monthly payments $800, and 14.58 years left on her mortgage. The interest rate on Sue’s mortgage is 5% and the long-term rate of return on her RRSP’s is 5%.
If Sue has $500 of extra cash per month, should she pay off her mortgage or contribute the extra cash to her RRSP?
Pay off Mortgage
If Sue uses the extra $500 per month to pay down her mortgage, her mortgage will be reduced by $55,672 and her amortization period will be reduced from 14.58 years to only 7.67 years.
Contribute to RRSP
If Sue contributes the extra $500 to her RRSP each month, her RRSP will grow to $55,672 in 7.67 years. In addition, she will have saved taxes of $18,400 over 7.67 years, based on a 40% tax rate. Therefore, contributing to RRSP’s makes more sense for Sue, because of the tax savings.
Contribute to RRSP and Pay Down Mortgage
If Sue contributed $500 monthly to her RRSP and used the tax savings to pay down her mortgage faster, then Sue would end up with the following result:
- $55,672 in her RRSP in 7.67 years
- She would pay down her mortgage by a total of $33,517; and
- Sue’s amortization period on her mortgage would be reduced to only 10.67 years.
Therefore, the best outcome for Sue would result if she contributed to her RRSP and used the tax savings pay-down her mortgage.
5. Turn mortgage interest into tax deductions
Mortgage interest that you pay to your bank for your home can be deducted, contrary to what most people think. If you borrow money against the equity in your home and use that money to purchase income producing investments (e.g. real estate, stocks, bonds, etc.), then the interest paid on the money borrowed can be deducted on your personal tax return.
You may also view a summary of the tips in my video:
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.