Tax season is upon us, and once again it’s time to drag out those boxes of expense records you’ve been saving all year. Having a good handle on your taxes is important but if you start looking for additional ways to reduce what you pay, that’s even better. More and more Canadians are starting to use the Tax Free Savings Plan and Registered Retirement Savings Plans, but these options are not the only ones that exist. In this post I’ll be walking you through five different ways to reduce the amount of tax you will pay.
- Separate Business and Personal Expenses
One way to reduce your tax bill is to separate your business and personal expenses as much as you can. This may seem like common sense, but many small business owners fail to do this.
The easiest way to keep your business and personal expenses separate is to use a separate credit card for each. This makes it easy to track business expenses at tax time, and you can even get a small discount on some purchases if you use a credit card that earns rewards for business expenses. However, if you’re not careful, this can also turn into an expensive habit, especially when you consider the potential for interest charges on balances and annual fees.
- Keep Accurate Records
Taxes in Canada are due on April 30th, but if you’re a sole proprietor or partner, you have until June 15th to file your tax return. If you owe taxes to the CRA, that’s when they are due as well.
It’s critical that you keep all receipts and records of expenses related to earning income from your business. When it comes time to file your taxes, you’ll need these documents to track all of your income and expenses. The more detailed and accurate these records are, the better chance you’ll have at reducing your tax bill and increasing your refund.
- File Taxes On-Time
If you file late, or if you owe money and don’t pay by the tax deadline, the CRA will charge interest on any taxes owing and possibly penalties. If you can’t pay by the deadline, contact the CRA right away to find out what options are available. Filing late is a lot more expensive than paying late.
- RRSP contributions are Tax Deductible
Contributions to an RRSP are made pre-tax, which means you don’t have to pay any income tax on the money you contribute until you start withdrawing it from your account in retirement.
Registered Retirement Savings Plan (RRSP) contributions are a great way to offset taxable income. Depending on your income level and province of residence, you can deduct up to 18% of your gross income for the prior year from your taxes. This is a great way to reduce your taxable income, resulting in lower taxes owed or a larger refund (depending on your situation).
If you don’t have an RRSP account, there’s still time before the March 1 deadline to open one and contribute!
- Borrow Money for an Investment Property
If you borrow money for an investment property, the interest is usually tax deductible. If you or your spouse have sufficient income to cover the mortgage payments, this is a good way to generate tax-free cash flow. You could then reinvest that cash into your RRSP.
The key is to make sure you are able to make the mortgage payments on the investment property. If you can’t make the payments, it’s not likely going to be a good investment, and you will end up owing more taxes than you save.
The beauty of these tax tips is that they’re applicable to everyone, regardless of your socioeconomic status or profession. Whether you are a teacher or doctor, a corporate worker in downtown Toronto or an employee of a small company in Vancouver, there are simple steps you can take to reduce your tax bill each year. These will not only help you to keep more of your own money, but they may even save you a lot of stress come tax time by making the process as painless as possible.