With a little planning and research, you can pay less income tax in Canada:
RRSPs are the most important tax planning strategy for individual taxpayers. An RRSP provides a tax deduction for the contribution, while also allowing the amount to grow tax free until retirement.
Canadians should contribute to their RRSPs as soon as possible because the sooner the contributions are made, the more they benefit from compounded tax free growth.
2. Open a Tax Free Savings Accounts (TFSA)
The tax free savings account can be used to generate tax free savings. Although contributions to a TFSA are not tax deductible like RRSPs, the earnings from any investment source in the account are not subject to taxation when earned or when withdrawn.
3. Take advantage of tax-free benefits through your employer
Employees often forget about the perks available through your workspace. Ask your employer about RRSP or pension contributions paid by your employer. Additionally, your work may sponsor employment related moving, training, counselling, and health costs.
In this second section, we'll move on to tax tips for those who are self-employed.
There are many financial tips and tax deductions for independent consultants and the self employed because they fall under the same tax guidelines as a small business owner. Here are some ways a small business can pay less taxes:
4. Health Spending Account (HSA)
If you are an incorporated business owner, a Health Spending Account is for you. It is a CRA-approved tax plan which turns your after-tax personal medical expenses into before-tax business deductibles. Basically, you can claim expenses through your business as before-tax. It treats your corporation as the employer, and you (the owner) as its employee. This type of plan works for small family business (such as an incorporated consultant) as well as a business with arm's length employees.
Every year, small business owners use traditional health insurance to cover their medical costs because it is so widely marketed. However, you only want to insure low-probability, highly catastrophic events like your property burning down. Insurance is not effective for planned or administrative events such as a dental appointment.
A Health Spending Account has no premiums and wide coverage for eligible health and dental expenses. This is why an HSA works especially well for small businesses. Here is our top 19 FAQ for an HSA, give it a read to learn more.
5. Know your eligible expenses
Money spent on your work as a small business owner can be claimed as a tax deduction under reasonable circumstance. If you own a car, keep track of mileage used while working. However, don’t expense the cost of a gas refill every time. Think back to reasonable circumstances. If you are an independent contractor, some popular eligible business deductibles are material and supplies (including equipment), rent, travel, and continuing education. Reasonable is subjective. You’d be surprised to hear that kitchen equipment (used to test new recipes) could be considered a legitimate business expense for a cookbook author.
6. Balance your Dividend/Salary Mix
As a small business owner, you are entitled to withdrawing cash from your corporation as either a dividend or salary. Both have their perks and downfalls. Ultimately, it is up the owner to determine what mix will maximize their earnings (based on each owner’s unique circumstances). For example, you may want to pay yourself with enough salary to max out your RRSP. On the other hand, you may want to take out part of your pay as a dividend, to take advantage of a lower tax rate. Not only is your mix determined by current circumstances, but also future predictions. If you expect an economic downturn in the next year, it may not be wise to pay out a large salary. Also consider other sources of income, tax credits, and corporate cash needs.
7. Budget accordingly
Unlike traditional employees, independent consultants or freelancers may not receive work on a regular or scheduled basis. As a result, you may have financial highs and lows throughout the months. Don’t spend all your money in a month with more work hours. An experienced contractor recognizes their income patterns and budgets accordingly.
8. Remember the GST/HST Accounts
In Canada, those who are self-employed and making more than $30,000 a year need to charge and collect GST/HST from their clients.
9. Be “tax-smart” in your investments
Be aware of what form of investment income you are receiving, whether it is a dividend or capital gain. They all have different tax rates. Consider investing through a TFSA. You are not taxed on any withdrawals or earnings made from this account.
10. Get Help from a Professional
At the end of the day, we can offer you general advice, but if you have a specific situation, it is best to consult with a tax expert. Another option is to consult with the Canadian Revenue Agency (CRA). Additionally, by contacting a professional, you could find ways to increase your take-home or after-tax amount. As Canada’s financial regulations are under constant change, it can be difficult to stay on top of things. A knowledgeable source is best when dealing with something important like your financial resources.
Want to know how much you could save by using a Health Spending Account (HSA)?
Try our Savings Calculator below. An HSA works by turning after-tax medical costs into before-tax business deductibles:
More reading on how to pay less income taxes in Canada: