Whether you’re a serial investor or just bought your first major investment, there’s no better feeling than saving money after filing your taxes. And having the right financial tools and strategies in place can make all the difference.
So we asked our tax experts for their best advice on how to protect—and keep more of your hard-earned money. Here are 9 tax-saving strategies to help you lower your tax bill.
- RRSPs, TFSAs and RESPs can greatly reduce your tax bill.
- The First-Time Home Buyers’ Credit gives you a $10,000 credit when you buy your first property.
- Income splitting with a spousal RRSP can reduce your taxes in retirement.
1. Reduce your taxable income with RRSPs
A Registered Retirement Savings Plan (RRSP) is an excellent way to reduce your taxable income and save for retirement. By saving money in an RRSP fund, you protect that portion of your revenue from taxes as you’re only taxed on the income left after RRSP deductions.
For example: if you earn $60K a year and contribute $5K to your RRSPs, you’ll be taxed based on $55K, not $60K.
To sweeten this deal, you only pay income tax on this investment, and the income it earns, when you make withdrawals from your RRSP. Ideally, you’ll make these withdrawals when you retire and are more likely to be in a lower income tax bracket.
2. Open a tax-free savings account (TFSA)
This is a win-win investment vehicle if there ever was one, especially for anyone over 18 (or, in some provinces, 19). Investments you hold in your TFSA—such as cash, GICs, mutual funds, stocks, or bonds—let you earn interest, dividends, or capital gains without a tax hit.
Tip: for 2023, the annual contribution limit is $6,500, but you may be able to increase that sum if you haven’t taken advantage of TFSA contributions in previous years.
Ask a tax expert, or visit the CRA website under My Account, to see how much room you have in your TFSA. You’ll be glad you did.
3. Income Split with your Spouse
Sharing or splitting pension income with your spouse lowers your income, and increases theirs. The idea is for one of you to reduce your tax liability without overly increasing your spouse’s to save on taxes together. Using a software like TurboTax Live Full Service will help to optimize this calculation for you.
Note: not all pension income qualifies, specifically government pensions such as CPP or QPP benefits. Find out here if you qualify to split your pension income.
4. Take advantage of employer pension matching programs
If your employer offers a pension program, these are essentially free retirement funds. Plans that offer you a pre-tax contribution option, will deduct your retirement contributions from your gross pay, and then calculate taxes to withhold from your remaining pay after the contribution (vs calculating the taxes to withhold from your gross pay, then making an after-tax contribution).
For example: You live in Quebec, and you earn $50K per year. If you were to contribute $100 every two weeks to your retirement plan, that $100 would save you $32.33 in taxes, so it’ll only cost you $67.67 to invest $100! This up-front tax savings can help you reach your savings goals much faster.
That doesn’t include the employer portion if any, which are pension funds set aside for you, by your boss.
5. Invest in real estate
It’s no secret that real estate can be a great way to amass wealth. What’s just as good is that when you sell your primary property (not an investment property) the capital gains you make are tax-free!
As long as you live in the space, without using it for any rental purposes, all that profit is yours. So, if you buy a condo for 500K and sell it for 800K, the $300K difference is yours to keep tax-free.
Capital gains aside, if you invest in a rental property, you can save tax on the rental income you earn by deducting related expenses. You can lower your rental income even further by taking the Capital Cost Allowance (CCA) deduction, which basically lets you to depreciate part of your building and other assets* or additions creating an expense to offset your income (excluding land, which isn’t depreciable).
Real Estate Investment Trust (REIT)
For those looking for an alternative to purchasing and managing a typical rental property, a REIT may be the way to go. Similar to a mutual fund, a REIT lets small or large investors own a share of real estate.
So investing in a REIT allows for sharing the profit of multiple real estate properties held within one fund. It’s simpler to invest in because you can buy shares listed on the stock market which will pay you part of the profit of the properties held within the portfolio of that specific REIT.
When income is distributed, you will receive a payment in the form of a dividend, which will be reported as income to you on a T3 slip (as well as a Releve 16 in Québec).
Have you started investing the the stock market? If so, check out our tax expert, Emily, share the 6 most common mistakes investors make when filing their taxes.
6. Claim the First-Time Home Buyers’ tax credit
If you and your spouse (or common law partner) decide to take the plunge and buy that first property, you can claim a $10,000 tax credit. That’s a nice housewarming gift.
For 2023 and the tax years that follow, the federal budget proposes to increase the HBTC to $10,000. This will double the value of this non-refundable tax credit from $750 to $1,500 once it takes effect.
To qualify for this tax break, you or your significant other can’t have lived in a previous home owned by either of you in the past four years.
7. Look into government reimbursements for eco-friendly upgrades
Canada Greener Homes Grant: think of this as free cash from the government, just for becoming more eco-friendly. You’ll likely qualify for the Canada Greener Homes Loan which offers a zero interest loan to pay for the upgrades. Unbelievable but true!
The Roulez Vert program in Québec: this is a nontaxable subsidy that offers a rebate of $7K towards the purchase of All-electric vehicles with an MSRP of less than $60K.
8. Invest in your child’s future with a RESP
If you’re a parent, investing in your children’s post-secondary education with a Registered Education Savings Plan (RESP) is good math because you don’t have to pay taxes on the money you put into this investment vehicle. These investments grow tax-free until the funds are withdrawn by the plan’s beneficiary, your child, to pay for their education.
It gets better.
The federal government chips in with the Canada Education Savings Grant (CESG). The maximum yearly CESG based on your income and contributions can range from $600 to a lifetime maximum of $7,200.
For example: Contributing $2,500 to your child’s RESP each year, will grant them an additional 20% or $500 per year from the government. After 15 years, you’ll have contributed $37,500, added to the government contribution of $7,200, which comes out to $44,700 in savings before interest. Now that’s intelligent!
9. Re-invest dividends, tax refunds, or savings to make the most of your dollars
Imagine paying yourself first before any of your bills when you get your paycheque. This is what re-investment is like!
You may receive monthly dividends, which are taxable, and there’s no way around that, however, if you reinvest the dividends back into the fund every month, you can increase your overall investment. This means your portfolio will grow in value, and future distributions will likely be higher.
No matter what life stage you’re in or how you choose to invest your money, you don’t have to be in the top 1% to save on your taxes.
By incorporating tax saving strategies along with being intentional with your tax planning, the extra effort you put in today can set you up to feel more confident and empowered about your financial future.
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