If you are tired of paying too much in tax, then please take advantage of my top tax savings strategies, which I have compiled over the years while working as a Chartered Accountant in Oakville.
Ask Your Employer for Tax-Free Benefits Instead of a Pay Increase
Who would ever want to give up a pay raise? “I certainly would, if my employer offered me tax-free benefits in lieu of a pay increase,” says Allan Madan, a Chartered Accountant in Oakville.
For example, an extra $10,000 of employment income would only leave you with $5,400 after-tax, if you are in the highest tax bracket. Alternatively, $10,000 in tax-free benefits paid by your employer would leave you better off by $10,000 after-tax. A difference of $4,600!
The only question is, which employer paid benefits are tax-free?
The most common, tax-free employment benefits are:
- Employer loan made to you to purchase a house
- Moving costs paid by your employer
- Reimbursement by your employer for a loss on the sale of your house
- Gifting assets of personal value to you
- In house daycare services provided by your employer
- Premiums paid by your employer for a group plan for sickness, disability or accident insurance
- Death benefits
- Premiums paid by your employer for health plans
Make a Loan from Your Corporation to Your Adult Child
If you have an adult child (18 or older) that needs financial help, then consider making a loan from your corporation.
As if that weren’t great enough, the CRA will allow your adult child to deduct any loan repayments made to your corporation. Therefore, when your adult child graduates and has a high paying job, he/she will benefit greatly from the tax deductions on loan repayments made.
“Corporate loans are an under-utilized tax savings strategy,” says Allan Madan, a Chartered Accountant in Oakville.
In summary, this is a ‘double-dip’ tax strategy, because the adult child pays little or no tax on receipt of the loan and receives big tax deductions on repayment of the loan in the future.
Purchase Low Tax-Rate Investments
When purchasing investments it’s very important to take into account the tax costs of those investments. If you don’t, you could end up with a lot less money that you expected.
Let’s take the example of Frank and Mary, both of whom have non-registered investments worth $100,000. Frank’s investment portfolio consists of shares in blue-chip companies that appreciate at the rate of 6% each year, on average. Mary’s investment portfolio is made up of medium-risk bonds that pay annual interest of 6% each year. Both Frank and Mary have a 40% tax rate.
If Frank and Mary were to sell all of their investments after 20 years, Frank would end up with $276,571 in after-tax cash, while Mary would end up with $202,859 in after-tax cash. Frank ended up with almost $74,000 more because only half of the profit on shares is taxed when they’re sold, whereas interest income tax when it’s paid (usually annually) and is fully taxable.
So which types of investments have the lowest tax rates?
In the province of Ontario, Canada, investments are taxed as follows (assuming that you’re in the highest tax bracket):
- Shares in companies – 23% (when sold)
- Interest – 46% (when paid, usually annually)
- Eligible dividends – 25% (when paid, usually quarterly or annually)
- Return of capital – tax free
You should consult with your Chartered Accountant in Oakville to discuss the tax implications of your investment portfolio.
Deduct All Possible Employment Expenses, says Chartered Accountant Oakville
As an employee, you should be aware of and deduct all allowable employment expenses on your income tax return. The following expenses, if paid by you, are tax deductible:
– Travel expenses (hotels, air fare and meals)
– Car expenses
– Office rent
– Union and professional dues
– Home office expenses
– Cost of supplies (includes cell phone airtime and long distance charges)
– Salary paid to an assistant
You must satisfy two main conditions in order to deduct employment related costs:
- Your employer must complete and sign Form T2200, Declaration of Conditions of Employment
- Per your employment contract, you are required to pay for employment expenses, which are necessary for you to perform your job
I encourage you to speak with a Chartered Accountant in Oakville to see if you’re claiming all possible tax deductions.
For additional information on deducting employment expenses, see Accounting Firm Toronto – How To Beat The Taxman
Split Income With Family Members Through Dividends
In the province of Ontario, Canada, a shareholder can receive up to $40,000 in dividends from his corporation, without paying any income tax.
If you own a family business, it’s very advantageous to make your spouse and adult children shareholders in your company, so that each of you can receive up to $40,000 in dividends tax-free.
“Paying dividends to family members, if done properly, is an excellent tax savings strategy,” says Allan Madan, a Chartered Accountant in Oakville.
Issuing shares to family members doesn’t mean that you have to give up control of your corporation. For example, you could issue non-voting preferred shares to your family members, which would allow you to pay dividends to them without losing any control.
For further information on income splitting with dividends, see Tax-free Dividends
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.