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
- Inventory purchases
- Telephone and internet
- 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.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.