Do you get excited when the tax season rolls around? I bet no unless you are expecting a good fat refund. You can cry as much as you can, but paying taxes has become an inevitable reality. Plus, it seems that the reward for honest taxpayer’s reward is ever-increasing taxes. It’s the world we live in – an economy that thrives on debt – and sadly, nothing can erase that fact.
But even though taxes are here to stay, if you live in Canada, there are ways to lighten the burden of taxes on your finances. These ‘loopholes’ are actually legal and permitted by Canadian tax laws. It is only wise that you take advantage of them to lower the taxes you owe and to reduce your taxable income.
In this post, we have curated all the major ways that you can legally leverage tax deductions and credits to maximize all the tax benefits available to you.
Do not wait around for the end of April to file your taxes. It is better to do it as early as possible (no matter how much you hate it). This will give you enough time to figure out your unique tax situation. You’ll have time to figure out exactly how much you owe the government in taxes, and also apply these tax benefits to your unique situation to get as much money as you can on your tax refund.
The fundamentals of tax planning are pretty straightforward. In fact, you’re probably already using some of the most popular tax shelters without even knowing it and without using them effectively. If you own your own home outright and you contribute to a TFSA, an RRSP, or an RESP, you’re already headed in the right direction. The question now is: how do you get back even more money from taxes? How do you max out your tax benefits?
Tax refunds are basically down to two things: tax credits and tax deductions. Unfortunately, there are many Canadians who are leaving money in the government’s coffers because of these deductions and claims. Here we will reveal to you all the ways you can take advantage of tax benefits available to you if you live in Canada.
What Are Tax Deductions?
What a tax deduction does for you is that it reduces the amount of your income that is exposed to taxing. How does this work for your income?
Canada operates a well-structured and progressive marginal tax rate. Depending on the income level bracket that your income falls into, there is a prescribed marginal rate for your income. Your marginal rate is the percentage tax that is taken from every extra dollar you earn.
What Are The Canadian Tax Brackets For 2020?
The taxable income brackets and their corresponding 2020 federal tax rates (FTR) are as follows:
For an income bracket of $0 to $48,535, the FTR is 15%
Second, for an income bracket of $48,536 to $97,069, the FTR is 20.5%
Third, for an income bracket of $97,070 to $150,473, the FTR is 26%
Fourth, for an income bracket of $150,474 to $214,368, the FTR is 29%
Last but not least, for an income bracket of $214,369 and above, the FTR is 33%
So How Does This work? Let’s paint a clearer picture
Say you make $47,000 annually. From the listing above this puts your marginal federal rate at 15%, which means you owe $7,050 in taxes. If you are eligible for a $1,000 tax deduction, that means you now only owe taxes on $46,000 and not $47,000. And with $46,000 taxable, your new value is now $6,900 and not $7,050, which is a $150 (15% of $1,000) tax savings.
What about when you make an income of $219,000? Again, from the listing, you owe 33% tax on your income, which in this case would be ($48,535*0.15)+($48,534*0.205)+($53,404*0.26)+($63,895*0.29)+($4,632*0.33). This gives a value of $51,172.87 on an income of $219,000. With a deduction of $1,500, your taxable income will be $217,500 instead of $219,000. And your new tax becomes $50,677.87, which is $495 (33% of $1,500) less than $51,172.87.
So in both scenarios, not only do you save $1,000 and $1,500 in deductions, but you also save $150 and $495 in taxes.
So what are the best ways to reduce your income’s exposure with the help of tax deductions? Here are the legal ways to maximize your deductions.
Max Out Your RRSP Contributions
Every working Canadian knows – or should know – the importance of having a Registered Retirement Savings Plan (RRSP) account. Someone once said that RRSPs are the government’s weak way of apologizing to Canadians for the hefty taxes they have to pay. Whatever the case, it is wise to take advantage of this account to relieve your burden.
When you file your tax returns, bear in mind that this is the time to start growing your RRSP contribution. Currently, the 2020 contribution limit stands at $6,000, up from $5,500 in 2018. It doesn’t matter if you’ve never contributed to an RRSP before now; you can still play a little catch-up. According to law, you are allowed to contribute 18% of your income from the preceding year, up to that year’s corresponding contribution limit.
Also, the RRSP contribution room can be carried forward indefinitely. So if you have a contribution limit of $6,000 for 2020 and you only contribute $4,000 for the year, the $2,000 contribution room left will be carried over to the limit for the following year. Just make sure not to contribute more than your RRSP contribution limit. There is a 1% penalty attached to over contribution for every month that the excess remains in your RRSP.
This is a really wonderful way to slash your taxable income and save on taxes as well. RRSPs were primarily created for retirement savings but apparently, they can function as a means of immediate tax relief as well.
Bear in mind here that the window for RRSPs to receive tax-deductible income is always the first 60 days of every new year. This is why it’s important to always file your taxes early.
Another additional tip here: because of the way an RRSP operates, it is best utilized by people who have a high income of above $50,000 annually. Anything lower, and you may be served better by contributing to a Tax-Free Savings Account (TFSA) instead.
There are many tax return software, like TurboTax and or Wealthsimple’s Robo-advisor to prepare your returns.
Putting money in your RRSP though is just the first step in reducing taxes and taxable income. You can do more than that to actually help grow your retirement income. You can take that money and start an investment portfolio made up of stocks and bonds.
The right percentage of stocks and bonds can be had to determine on your own. So you can either use a traditional financial advisor or you can save on those hefty fees that come with that option by opting for a Robo-advisor.
With a Robo-advisor, you can automate the monitoring and rebalancing of your investment portfolio and at a much lower fee than if you went with a mutual fund or a traditional financial advisor. Again, Wealthsimple’s Robo-advisor is a top option here, but you can also compare different Robo-advisors in Canada to determine which will serve you best.
Gain Tax Deductions For Your Child Care Expenses
If you’re a parent with children under the age of 18, then no one knows more than you the burden of child care. This is especially true when it comes to household expenses tied to child care. Thankfully, according to the Canadian Revenue Agency, child care expenses fall under the category of tax-deductible income. Claiming them as tax deductions when filing your return is only right.
Bear in mind that most of the time, these expenses can only be claimed by the parent who has the lower net income (in the case of two-parent homes).
For 2020, the basic limit for child care expenses as stated by the CRA is $8000 for children born in 2012 or later, and $5000 for children born from 2002 to 2011. So basically, these deductibles are only possible for kids that are not older than 17, except in cases of mental or physical impairment.
Note that fees paid for daycares, in-home providers, summer day camps and overnight camps are also eligible to be claimed as tax deductions. You can check out this CRA resource for in-depth information concerning child care and family deductions.
Claim Tax Deductions On Moving Expenses
Moving to a new place costs money, whether direct or implicit costs. The Canadian tax structure allows you to claim these expenses as deductions. In order to claim tax deductions on moving expenses, your reason for moving has to be either for a new job or for a full-time post-secondary academic program.
Additionally, your new home has to be at least 40 kilometres closer to your new job or school than your former residence. If you meet these requirements, then you qualify for these tax deductions.
The expenses that can be claimed include the costs associated with selling your old house, buying your new one, and moving from the former to the latter.
Vehicle and travel expenses
Temporary living expenses
Fees paid for storing and transporting property
Fees incurred for change of address on documents
Utility Fees associated with disconnections and installations
Cost of title transfer to your new home
Cost of maintaining a vacant former residence
And any other eligible fee
There are a lot of other eligible tax deductions that you can check out. They include:
Professional or union-associated fees
Personal income tax deductions on employment expenses (you will need to fill a T2200 form for this)
Interest expense or charges tied to a business or investment income.
What Are Tax Credits?
While tax deductions help you make part of your income non-taxable, tax credits are basically refunds you get on your tax payable. So while both help you save money, the major difference is that with tax credits, you actually have to be owing tax to benefit from it.
There are two types of Canadian Tax Credits:
1. Non-Refundable Tax Credit is a direct fraction of the tax you owe. So if you make an income of $14,000, the tax you owe on it will be $2,100. If you get a tax credit of $300, your new tax owed becomes $1,800. So, if you owe no tax, you can get no tax credits.
2. Refundable Tax Credit will accrue to you even if you owe no taxes on your income. An example of this would be the GST/HST credit.
Some of the best ways to get all the tax credits available to you are listed right here.
Claim Your Basic Personal Amount
So the basic personal amount kind of feels like a tax deduction but it’s really not. Each year, while filing your tax return, you are entitled to a preset amount of money depending on your income bracket and as prescribed by the government. This money is called the basic personal amount and when you claim it, it is subtracted from your income and so tax is applied only to the income left after this money is deducted.
In 2019, the basic personal amount for those earning in the 26% federal tax rate income bracket and below ($150,473 and below) was $12,069. For 2020, this amount has been reviewed upwards to $13,229. You will find everything you need to know about the basic personal amount for your income level in this publication by the Dept. Of Finance news release.
Claim Spousal Amount For A Spouse or Common-law Partner
If you’ve got a wife, husband, or a common-law partner whose net income is lower than the $13,229 basic personal amount, you are eligible to claim a percentage or the entirety of the spousal amount of $13,229. The percentage of the spousal amount you can claim is determined by how much your spouse or partner makes. If your spouse earns a $10,000 net income, the spousal amount that can be claimed will now sit at $3,229. If your spouse or partner is considered dependent on you, then you are the only one eligible to claim the spousal amount.
Claim Your Age Amount Tax Credit
This can casually be termed the “growing old tax benefit” because that’s what it is. The first point of eligibility for this tax credit is that you are at least 65 years old by the end of the taxation year. For 2020, the federal age amount stands at $7,637 (up from $7,494 in 2019).
If you earn an income above $38,508 ($37,790 in 2019) and up to $89,421 ($87,750 in 2019), the age amount you are eligible to receive will be slashed by the equivalent of 15% of your income. If you make an income above $89,421, your age amount will be eliminated completely.
Tax credit in Canada is calculated with the lowest federal tax rate (FTR) of 15%. What this means is that the highest possible federal tax credit one can get in Canada is $1,146 for 2020 ($1,124 in 2019). If you cannot utilize your entire age amount before taxes owed reach zero, you can transfer it to your spouse.
There are many other tax credits that are worth a look:
Volunteer firefighter or Search & Rescue details
Student loan interest
Expenses of adoption
Medical expenses (this can include details of reimbursements for insurance)
Exam fees, (TL11A, T2202), tuition and education amounts
Donations or contributions to a political endeavour
Amend All Your Tax-Returns From Previous Years
As we stated earlier, it is possible to go back and claim all the deductions and credits that you missed out on as far as 10 years back. For the year 2020, this means you can also claim credits and deductions from 2010 to 2019 to trigger a refund from those years.
To claim these, you absolutely do not need to file a second tax return for those years; you only need to amend the already existing return for those years. To do this, you simply will need to fill out a T1-ADJ form (T1 Adjustment Request). Alternatively, you could head over to CRA’s My Account online and use the “Change My Return” service
Some of the commonly missed deductions and credits stated below can be taken advantage of from previous years to receive a larger tax refund:
1. Brokerage fees – These are the fees you paid for stock transactions in a non-registered account within the past 10 years. These fees can be deducted on your tax-return. Moving forward, you can utilize platforms like Questrade to purchase ETFs without paying any fees.
2. Capital losses – If you sold your stock, your ETF or stock for less than the purchase price, you should record your capital loss. This is because it can be carried over into future years until it can be used to offset any capital gains.
3. Tuition credits – If you have a child or dependents currently at the level of post-secondary education, you can actually transfer some of his/her tuition credits to yourself annually. This is possible because, at that point, it is unlikely that he/she is making enough income to utilize all the credits due to them. You can transfer up to $5,000 of their tuition credits to yourself every year.
4. Disability amount – If you have a child that is considered to have a severe disability, all you need to claim the credit for the disability amount is a diagnosis confirmation certificate from your child’s doctor.
5. Charitable donations – This is another way to maximize your tax credits. Making charitable donations, especially as a couple can help maximize credit, especially when your donation is above $200. You can also claim the government’s first-time donor super credit for any eligible first-time donations made between March 20, 2013, and December 31, 2017. This federal tax credit gives you back an additional 25% on your first $1,000 donation. So if you haven’t claimed your charitable donations credit, now would be the time.
6. Caregiver amount – This tax credit is for those who have moved one or both parents into their home to take care of them. So long as your parents’ income falls within the stated income requirement bracket, you will be eligible to claim this tax credit.
Utilize Online Tax Return Software
When it comes to filing taxes, there are too many moving parts to take into account, and this makes the tax-filing process and arduous undertaking for the average Canadian.
But since traditional tax experts usually cost an arm and a leg, many Canadians are turning towards DIYing their tax return by using online tax software.
With online tax software, the process of filing your taxes becomes a lot more streamlined and easier. You will be able to import your tax return information from the CRA by using the ‘Auto-fill my return’ feature available in every top tax software.
You will also be able to look through an exhaustive pre-compiled list of tax deductions and credits so you can easily choose the ones that apply to your situation. The software will then be your guide as you apply its recommendations to ensure you don’t miss anything or include anything that shouldn’t be there.
Depending on the volume and complexity of your tax return, there are a plethora of tax return software to choose from.
Naturally, not all these deductions and credits will apply to everybody. For income level can decide if you would be better served contributing to an RRSP or a TFSA.
In addition to these, other reasons like your age, income level, marriage status, age of children, number of dependents and more are critical to identifying the deductions and credits that are right for you. Just make sure to comb through your records and prior tax returns to uncover every tax benefit that you are eligible for.
Of course, it’s a lot easier to do all this when you use a reputable tax online software. Our recommendation would be TurboTax. This is because it is affordable and also has the ability to auto-identify any deductions and loopholes to help you maximize your tax refund and save a whole lot more on tax.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.