6 Best Ways on How to Save Tax in Canada

Filing taxes is a stressful process for many Canadians. From collecting all the requisite paperwork to meeting deadlines, it can be tough to feel confident that you have done everything right. The process often feels even more daunting for those who are small business owners.

Yet filing taxes does not have to be as hard as it may seem at the outset. There are many strategies Ontario residents are using to save on their taxes, such as considering when to file, what to write off as tax-deductible, and how to maximize the use of tax-free savings accounts, among other things. These are things that any Canadian can do to save on taxes when empowered with this information.

That’s why we created this guide on how to save on taxes in Canada, and these are just a few of the many strategies out there. We hope that you will find yourself making more tax-saving investments in no time.

Filing your taxes promptly is one of the best ways to get tax savings in Ontario. This year, self-employed Canadians had to file their taxes by June 15. Yet in some cases, even if you are self-employed, you must submit your information several weeks before that.

Those who owe money to the Canada Revenue Agency need to pay their tax bills by April 30. These deadlines are important because if you do not abide by them, you may be subject to late-filing penalties.

Putting money into your Registered Retirement Savings Plan (RRSP) every year can lead to long-term savings.  This point is particularly true if you contribute the maximum amount allowed for each year.

Making contributions to your RRSP saves tax money in more than one way. The money you initially put into your RRSP is tax-deductible. Any of the gains on your investment in your RRSP also are not taxable.  Given this, making contributions to your RRSP can also be called sheltering your income because the plan lets you “shelter” your savings from taxes.

At age 71, a taxpayer must begin to use the funds from their RRSP. When the money is withdrawn, it becomes taxable. Still, this can lead to several years, or even several decades, of tax savings for many Canadians.

However, it is crucial not to go above your RRSP limit. You can find out your limit this year by looking at your previous year’s Notice of Assessment. Going above your limit can lead to a monthly financial penalty.

Tax-Free Savings Accounts, or TFSAs, are another option to save money without accumulating taxes on it. The government created the TFSA program in 2009 as a form of tax-saving investment in Canada. There are several types of TFSAs, but typically any Canadian can open one of these accounts when they turn 18.

Like with RRSPs, there is a limit on how much money can be contributed to a TFSA. Make sure to check your limits annually to make sure you are abiding by the guidelines.

Borrowing money to make certain types of purchases can be a tax-saving measure. However, it depends on the details of the loan. Only loans for making investments, such as into the stock market, are tax-deductible.

Imagine that an individual wants to both invest in the stock market and buy a new high-end desktop computer, but will need to take out a loan to make one of these purchases. Their loan for their investment would be tax-deductible, but their loan for a computer would not. As a result, it would be best to buy the computer with any savings they might have and acquire a tax-deductible loan to buy stocks.

Buying stocks, bonds, and mutual funds can also, of course, lead to substantial financial gain over time. However, if you are planning on getting involved with the stock market, it is helpful to do thorough research or consult a professional financial planner before making any major decisions.

One of the less-discussed benefits of purchasing life insurance is that it can often allow for tax benefits. Purchasing permanent life insurance is a frequent strategy that the wealthiest Canadians use to save money on taxes.

For the average person, however, purchasing permanent life insurance would be out of their budget range. In some cases, it is possible to get permanent life insurance through your workplace or for it. Other terms that may be used for permanent life insurance policies in these contexts are universal life or whole life policies.

One aspect of many permanent life insurance policies is the ability to make non-taxable investments.  This is similar to your Registered Retirement Savings Plan in that there is no tax on the growth of your investments while they are in the life insurance fund.

However, you do not get a tax reduction on the money that you initially deposited into the fund. As with an RRSP, you will not be fined for taxes unless you withdraw money from the policy or the policy is surrendered.

Life insurance stands out as an option because it is a way to be mindful of tax savings far into the future. All life insurance funds, including those invested, are received without tax at the time of the policyholder’s death.

There is a cap on the amount of money you can put into your life insurance fund, and going beyond that cap will lead to having to pay taxes on it. Be careful to do your research on the maximum amount that you can contribute to your fund.

RELATED ARTICLE

Some employment-related expenses made throughout the year might qualify as tax deductions on your tax return. You can save the tax you would pay on these items by claiming these expenses.

The authorization from employers that allows you to claim these purchases is included in the T2200 form.

There is much more flexibility for business owners and companies rather than the average employee, but anyone can benefit. You do not have to hand in this form, but it is important to hang on to it for later in case you need to go back into your records for any reason, including if you are audited.