We are going to provide you with the best, well-known ways to save on taxes in Canada while also providing expert direction to help you empower yourself to make informed decisions and keep your money working for you. Let us get past the jargon and get to the heart of how to claim tax credits and deductions and contribute to registered accounts like pros.
1. Maximize Your RRSP Contributions
Putting money into your Registered Retirement Savings Plan (RRSP) is still one of the best ways to reduce your taxes in Canada. For the 2024 tax year (which affects your 2025 filing), you can contribute up to 18% of your earned income from the previous year up to a specific limit. This contribution lowers your annual taxable income, leading to real tax savings. Plus, any investments you make within the RRSP grow tax-free until you take them out in retirement.
- But don’t just throw money in without a plan. Think about your current and future tax brackets. If you expect to be in a lower tax bracket when you retire, making the most of your RRSP contributions now can pay off. Also, check out the Home Buyer’s Plan and Lifelong Learning Plan, which lets you withdraw from your RRSP without tax penalties under certain conditions.
- Maximizing RRSP contributions is usually a no-brainer if you earn a high income. However, if you’re on the lower end of the income scale, it’s wise to weigh the immediate tax benefits against the possibility of lower tax rates in retirement. In some situations, focusing on TFSA contributions might be the more intelligent choice for long-term gains.
2. Take Advantage of Tax-Free Savings Accounts (TFSAs)
The Tax-Free Savings Account (TFSA) is a powerful vehicle that is more than savings. Although contributions are not tax-deductible at the time of contribution, the magic is in the tax-free growth of your investments and the tax-free withdrawal – for any reason, at any time. The TFSA contribution limit in 2024 is $7,000; the unused contribution room will be carried forward.
- Don’t limit your TFSA to just cash. Utilize its tax-sheltered environment for investments with high growth potential, such as stocks, mutual funds, or ETFs. The longer your investments grow tax-free, the more significant the benefit. Understand your cumulative contribution room and strategically “catch up” if you haven’t maximized it in previous years.
- For younger individuals or those in lower tax brackets, prioritizing TFSA contributions can provide more immediate and flexible tax benefits, especially if you anticipate needing the funds before retirement.
3. Incorporate Your Business
Incorporating your venture can unlock significant tax advantages if you’re self-employed or running a thriving small business. Canadian corporations are subject to lower tax rates compared to individual tax rates. The Small Business Deduction (SBD) further reduces the corporate tax rate on the first $500,000 of active business income for qualifying corporations.
- Incorporation isn’t a one-size-fits-all solution. It does come with added administrative tasks and costs. The real advantage is that you can decide when and how to take profits, which might help you defer personal taxes. You can pay yourself a salary (which the corporation can deduct, but you’ll pay taxes on) or dividends (which aren’t deductible for the corporation but are taxed at a lower personal rate). The best approach depends on your unique tax situation, both personally and for your business.
- Make sure you understand how taxes apply to investment income earned within the corporation and the potential for tax integration when you distribute corporate earnings.
4. Split Income with Family Members
Income splitting with a lower tax bracket family member (for example, a spouse) can significantly reduce your household’s tax liability. The rules around income splitting have now become a little more challenging to understand; however, some strategies will still work:
- Spousal RRSPs: If you contribute to a Spousal RRSP, the higher-earning spouse gets a tax deduction now, while the lower-earning spouse will be taxed on withdrawals in retirement (ideally at a lower rate). Be mindful of the three-year attribution rule.
- Paying Reasonable Salaries to Family Members: If family members are genuinely involved in your business, paying them a reasonable salary for their work is a deductible business expense and taxed in their hands (potentially at a lower rate). Ensure the salary is well-documented and justifiable.
- Understand the “kiddie tax” rules, which limit income splitting with minor children. You could take advantage of trusts or holding companies to income split. Still, you would want to understand the legal implications and any unintended consequences you could have within the current regulations.
Income-splitting strategies require careful planning and adherence to the Income Tax Act. Seek professional advice to comply with all relevant rules and get the best tax savings possible.
5. Claim All Possible Deductions and Credits
You might already know that the Canadian tax system provides numerous deductions (which reduce taxable income) and credits (which reduce taxes payable on a dollar-for-dollar basis). It is important to stay updated, as well as keep track of the expenses that may qualify for a deduction and/or credit.
- For the 2024 tax year, look for deductions, such as home office expenses (detailed method), eligible medical expenses (remember the threshold!), moving expenses (if applicable), professional and union dues, and allowable investment expenses. And, look for credits, such as Canada’s Workers Benefit (CWB), tuition and education amounts (including transfers where available), the climate action incentive payment (if applicable in your province) and other provincial and territorial credits.
- It’s very important to have complete records for all deductions and credits claimed on your tax return. Use tax software or have a professional accountant prepare your return to be sure you are not missing tax savings, and to ensure that you understand the eligibility for your claims.
6. Invest in Tax-Efficient Accounts and Products
The way you hold investments can have a significant impact on after-tax returns.
- Invest in interest generating investments (such as bonds or high dividend yield stocks) in registered accounts such as RRSPs and TFSAs, so that the interest and dividends are not taxed right away. Only 50% of capital gains is taxed and can be held in taxable accounts, giving you more control over whether or not to realize a gain and which period it belongs to. Look for tax-efficient ETFs and mutual funds that minimize distributions that are taxable.
- Know the tax implications of different types of investments and account types. If you have taxable accounts, also consider tax-loss selling strategically to offset capital gains.
7. Plan for Capital Gains and Losses
Being aware of the timing of when you realize capital gains and losses can be an effective tax saving tool.
- Understand the “50% inclusion rate” for capital gains in Canada. Be strategic with the timing of selling appreciated assets considering your total income and tax bracket at the time of disposition. Make use of tax-loss selling (selling investments at a loss), in order to offset your realized capital gains to lower your tax burden. You should also be mindful of the superficial loss rules, which state that you can‘t claim a loss if you repurchase the same investment within a window of 30 days.
- Keep your investment strategy in mind with your overall tax strategy. Think about the long-term impact of realizing capital gains versus deferring them.
8. Contribute to a Registered Education Savings Plan (RESP)
Contributing to a Registered Education Savings Plan (RESP) is a dual-benefit strategy: it helps fund your child’s post-secondary education while also offering tax benefits.
- While your contributions to an RESP are not personally deductible as an expense, the growth of the investments are tax sheltered while in the RESP. The icing on the cake is the Canada Education Savings Grant (CESG), in which the government will match a percentage of your contributions. Understand the annual contribution limits, the lifetime contribution limits, and various levels of grants. When your child withdraws funds for eligible educational related expenses the income and grants accumulate will be taxed in the hands of your child, and since most children do not earn a significant amount in taxable income, the tax rate will be lower.
- Make sure to start making contributions to an RESP as soon as you can to maximize various government grants and provide ample time for significant tax-free growth.
Conclusion
Reducing your tax burden in Canada isn’t a question of finding loopholes; it’s about understanding the CRA rules and maximizing all of the various deductions, credits, income-splitting opportunities and registered accounts available to you, while being tax–efficient. With some preventative planning and expert advice, you can legally reduce your tax liabilities and put more of your hard-earned money towards achieving your 2025 financial goals. Happy savings!
