In any civilized country, its citizens can expect to have public infrastructure, some form of healthcare, public transportation, community outreach programs, and more. However, all these things cost money. Where does the government get the funds to sustain, improve and build its public infrastructure? One source of income is from the taxes it levies on its citizens. These taxes include income tax, goods and services tax, taxes on investments, etc. While taxes are great for the overall good of the nation, it can take a toll on personal finances. Luckily, there are several ways you can reduce the amount you pay on taxes.
With tax-filing deadlines soon approaching, we’ve collated a few ways you can save on taxes in the new financial year of 2022.
Tax-Saving Tip #1: Be diligent with record-keeping
One of the ways you end up paying more taxes is when you haven’t kept track of your deductible expenses. To avoid paying extra taxes, always make sure you keep a complete record of all your expenses. These records - whether electronic like e-receipts, electronic scans of paper receipts, or physical receipts - should be filed to help you get higher tax returns. Do keep in mind that the ink on physical receipts can fade in time and with friction if not stored properly. So, make sure to store them carefully. Alternatively, and to be doubly sure, you can regularly scan any receipts you collect and keep electronic copies on file online.
Tax-Saving Tip #2: Know when to file taxes and always file your taxes on time
Filing your taxes on time helps you to avoid penalties and late fees. It also shows that you are an upstanding citizen. Obviously, to make sure that you are paying your taxes on time you need to know your tax filing deadlines. Knowing exactly when you need to file your taxes will help you to pay your taxes on time and never pay a late fee or penalty again. The payment deadline for all individuals this year is May 2, 2022. If you are a self-employed taxpayer, you need to file your taxes by June 15, 2022. However, keep in mind that even if you are a self-employed taxpayer, you need to make sure to pay any balance owed by May 2, 2022.
Tax-Saving Tip #3: If you’re hiring, hire a family member
No, we’re not promoting nepotism, just a way for you to save on taxes. If you hire your spouse or one of your children, then you can reap certain benefits on the salary you would have to pay them for their services. This is because the ‘basic personal amount’ portion of their services is deemed to be tax-free. In addition to this, any salaries you pay to immediate family members may also be counted as tax deductions for your business. Of course, you need to make sure that you do not misuse this tip. Hire family members only for legitimate roles that they are qualified to perform. Additionally, always ensure that the salaries you pay them are according to the market standards and not wildly inflated to save on taxes. Further, you should also make sure that you have a well-documented paper trail and that there are no discrepancies between the scope of work, services performed, and salaries paid out. In short, treat them as you would a regular employee, while still gaining great benefits for your taxes.
Tax-Saving Tip #4: Keep your personal and professional expenses separate
It’s a good idea to make a distinction between your personal expenses and professional expenses. Professional expenses are deductible. On the other hand, personal expenses may not always be deductible. How do you separate your personal and professional expenses? If you are employed, then you can easily use separate debit or credit cards and separate bank accounts. This will help you ensure that you can track (and separate) your personal and professional expenses. On the other hand, if you are self-employed, then you need to ensure that any business-related expenses are clearly documented so they do not appear to be personal expenses that you are claiming as a deductible.
Tax-Saving Tip #5: Invest in RRSPs, TFSAs and RESPs
The Canadian government can help you reduce your tax expenses too. You can use tax-friendly or tax-deferred accounts to reduce the amount that is taxable and the overall amount of taxes. You may have heard of them before: RRSPs, RESPs, and TFSAs. Let’s go into a little detail on each of these options.
RRSPs: Registered Retirement Savings Plans (RRSPs) help you to lower your taxable income. It’s a tax-free investment which means the money added to this fund can grow and no additional taxes will be imposed on it, until you withdraw the funds. When it’s time to withdraw the funds (in retirement), your taxable income will be much lower than it is today. So, you’ll pay far less taxes on your money! However, there is a limit on how much money you can put in the fund. Generally, you can put up to 18% of your declared income in an RRSP with a maximum contribution limit of $29,210. Make sure to put as much into your RRSP as possible, so that you can save on taxes.
TFSAs: Tax-Free Savings Accounts (TFSAs) allow you to save taxes as no taxes are applied when you make withdrawals from TFSA accounts. TFSAs allow you to grow your investment, just like an RRSP. But, unlike an RRSP, you can withdraw funds from this account at any time, without worrying about having to face any taxes or penalties. In 2022, you can contribute a maximum amount of $6,000. However, there are also account lifetime limits, which means you can contribute next year if you have not reached this limit. TFSAs thus help you to save on taxes that you would otherwise have to pay.
RESPs: Registered Education Savings Plans (RESPs) can be used to save money for a child’s post-secondary education while saving taxes at the same time. Just as the funds put into an RRSP can grow tax-free, the funds you put in a Registered Education Savings Plan can also grow tax-free. Any growth is taxed on the hands of the recipient, which would be the student and not the main contributor. Obviously, their tax rate would be much less. The Canadian government also offers a Canada Education Savings Grant to match a portion of the RESP contributions. Currently, the Canada Education Savings Grant will match about 20% of the annual contributions with a maximum limit of $2500 per year. Keep in mind that the lifetime maximum limit that the Canada Education Savings Grant can match is $7500. Either way, you can save on taxes with the help of an RESP.
Tax-Saving Tip #6: Choose your investments carefully to save on taxes
You’re most likely aware that you’re taxed on your income. But did you know that you are also taxed on your investments? Not all investments are taxed in the same way. Some investments are given certain tax benefits while others must bear the full brunt of taxation. That is why it is advisable to choose your investments in a way that will help you to save taxes. So, you should align your investment strategy with your tax-saving strategy. Keep in mind that you would get tax breaks on investments such as stocks and even on dividends and capital gains. On the other hand, fixed-income investments such as bonds, mutual funds and savings accounts are taxable.
Tax-Saving Tip #7: Donate to charities to save on taxes
Who says you can’t help the less fortunate while also helping yourself. Donating to charities or social causes goes far beyond just making you feel good. It does wonders for your tax-savings as well. This is because many types of donations give you tax credits. In fact, you can receive 33% of your donation as tax credits on the federal level if your income falls into a certain tax bracket. No matter your income, you will likely receive some tax credit at the provincial level too. Give, and you too shall receive.
So, there you have it - some great ways to save on your taxes this year. For more tax-saving expertise, you can always reach out to our advisors who will be able to guide you towards even more tax-savings.