The difference between gross and net pay can be surprising. Fortunately, there are several ways to reduce this gap and therefore pay less tax. Follow these steps and leave less money on the table.
1. Understand your taxes better with our glossary
Before going any further, watch this video to better understand the basics of taxation. Now that that’s out of the way, here are definitions of some common terms.
- Gross salary: this is the amount you receive before various deductions are taken (federal and provincial tax, employment insurance, pension plan contributions, group insurance premiums, etc.).
- Net salary: This is the amount you have left after the deductions mentioned in the previous definition.
- Taxable income: This is the portion of your annual income on which tax is applied. Annual income includes your salary and other income such as bonuses, scholarships, tips, investment income, etc.
- Tax rate: This is the percentage of your income deducted in tax. In Canada, you pay tax to both the federal and provincial levels. The provincial tax rate varies by province.Â
- Tax brackets: In Canada, the tax system is progressive. In other words, the more money you earn, the more tax you pay. Different tax brackets may apply depending on your taxable income.
2. Reduce your taxable income
Here are some effective ways to reduce your taxable income, and therefore the tax you have to pay.
Contribute the maximum to your RRSP
Is your tax rate high? Keep in mind that the money you contribute to an RRSP reduces your taxable income. The more you contribute, the more you save on taxes. However, it’s important to know that everyone has an annual contribution limit, which is the maximum amount they can invest in an RRSP in a year. This varies depending on your income. Consult your Notice of Assessment issued by the Canada Revenue Agency to find out yours.
In addition to reducing your taxable income, your RRSP contributions and any earnings you make remain tax-free until you withdraw them. Amounts you withdraw from your RRSP, unless you do so through the HBP or LLP, are taxable and added to your taxable income.
However, it’s important to know that an RRSP should primarily be used to invest for your retirement. And because your taxable income in retirement is likely to be lower than the taxable income you had during your working life, you’ll pay less tax by withdrawing money from your RRSP once you retire. It’s therefore more advantageous from a tax perspective to wait before withdrawing money.
Contribute the maximum to your CELIAPP
Thinking about buying your first home? The new Tax-Free Savings Account for First-Time Home Buyers (TFSBA) helps reduce your taxable income.
The TFSA offers the same tax benefits as an RRSP: contributions reduce your taxable income, and your investment returns are tax-sheltered. And the amounts you withdraw from your TFSA to buy your first home are tax-free.
It is possible to contribute up to a maximum of $8,000 per year, with a lifetime limit
of $40,000.
Consider income splitting
Are you living as a couple? Income splitting may be an attractive option for you. This is when the person with the higher income transfers money to the other person to reduce their overall tax liability. For many retired couples, this is an attractive option.
You can also contribute to your partner’s RRSP, even if you are already 71 years old, which is the age limit at which you can normally contribute to an RRSP, as long as your partner is under 71. However, you should know that the contributions you make to your partner’s RRSP belong to them.
3. Take advantage of the tax benefits of all registered accounts and plans
RRSPs and TFSAs aren’t the only ones that offer tax benefits; other registered accounts and plans also have tax advantages. They were created by the federal government to encourage people to save more.
It’s possible to hold several types of accounts and plans. However, it’s important to never lose sight of your savings needs and goals to help you make informed investment choices. Each savings vehicle has its own unique characteristics: for example, the TFSA is a good option for a short- or medium-term project. The RESP, on the other hand, allows you to save for your children’s post-secondary education.
Invest tax-free with the TFSA
Just like the RRSP and the TFSA, the Tax-Free Savings Account (TFSA) allows you to grow your money tax-free. What’s more, withdrawals are not taxable However, you have an annual contribution limit. What if you don’t reach it? Then you can carry over your unused contribution room to future years.Â
Take advantage of the grants offered by the RESP
The Registered Education Savings Plan (RESP) allows you to save tax-free for your children’s or loved ones’ post-secondary education. One notable advantage is that it offers generous government grants, which increase your savings.
Get government grants and bonds with the RDSP
The Registered Disability Savings Plan (RDSP) helps you set aside money to support yourself or a loved one with a disability. This savings tool allows you to access government grants and bonds.
Extend the benefits of your RRSP with a RIF
The year you turn 71, you must convert your RRSPs to RRIFs. Rest assured, your money will continue to grow tax-free. Except for the first year, you will then have to withdraw an increasing percentage of your savings annually, based on your age. These withdrawals will be added to your taxable income, but since it may be lower than during your working life, the tax rate will be lower as well.
4. Claim all tax credits, deductions, and other benefits you are entitled to.
Both levels of government – ​​federal and the one in your province of residence – make tax credits and deductions available to you, depending on your personal situation.
If you’re a first-time homebuyer, you may be eligible for the First-Time Home Buyers’ Tax Credit (FHBTC). Have you made improvements to your home that are more environmentally friendly? The Canada Greener Homes Grant ( CGHBG ) offers interest-free financing to help pay for your renovations.
Along the same lines, Quebec’s financial assistance for an electric vehicle can help you obtain financial assistance for the acquisition of a new or used electric vehicle, or a charging station.
But that’s not all: your medical, moving, childcare, home office expenses, donations, and more can also generate tax credits and deductions.
Make sure you don’t miss any by checking out this page: All deductions, credits a,nd expenses offered by the Canada Revenue AgencyÂ
Also, find out about those specific to your province. In Quebec, here is the exhaustive list of tax credits and deductions .
5. Reinvest your tax refund
Are you due a tax refund this year? You can use some of that money to treat yourself. It’s also a good idea to reinvest a good portion of it into your RRSP . y doing this, not only do you reduce your taxable income, but you also increase your chances of receiving another tax refund that you can then invest in your RRSP. In other words, saving is also a virtuous circle.Â
