Five Tax Savings Strategies
09 Sep 2019
Hafsa Sharif, CPA, CA - Accounting Associate
Paying tax bills could put a major dent in your pocket, making it difficult to reach your financial goals. Below are 5 great ways to reduce your tax bill.
1. Maximize your TFSA
The Tax-Free Savings Account (TFSA) allows any investment income earned within this account to be exempt from tax. Contributions to a TFSA are not tax-deductible and hence, the withdrawals, including income earned within the account, are tax-free. Individuals aged 18 or older can contribute an amount to this account annually. The maximum annual amount which can be contributed to the TFSA during 2019 is $6,000. The total contribution room in 2019 for an individual who has not yet contributed to the TFSA since its inception in 2009 is $63,500. To confirm your contribution room, please contact your financial advisor or accountant.
2. Contribute to RRSP
The Registered Retirement Savings Plan (RRSP) allows contributions to the account to be tax-deductible, with withdrawals being taxable. The investment income earned within the RRSP account is tax-deferred until withdrawn. The maximum annual RRSP contribution room is 18% of earned income, as reported in the prior year's income tax return, up to a maximum of $26,500 for 2019. The latest Notice of Assessment issued by the Canada Revenue Agency (CRA) to the taxpayer will generally indicate the current year's available RRSP contribution room and deduction limit. To confirm your contribution room, please contact the CRA or consult your accountant.
3. Capital gain/loss planning
In order to reduce any potential tax payable on capital gains incurred, a key strategy is to review your investment portfolio to identify investments in a loss position. By selling investments in a loss position, the capital losses arising will be applied against the capital gains, thereby reducing taxes payable. If capital losses are not fully utilized in the given year, the excess can be carried back 3 years or carried forward indefinitely to be applied against capital gains.
4. Make interest expense tax-deductible
Interest expenses on loans incurred to earn income from a business or investments can be claimed as a tax deduction, whereas any interest expenses on personal debt (ex. funds borrowed for RRSP contributions, purchase of a home, or to pay personal credit card bills) are not deductible for tax purposes. Hence, instead of using personal funds for business or investment purposes and borrowing funds for personal use, it is beneficial to borrow funds for income earning purposes and use one's own funds for personal use. In order to restructure the borrowing to ensure your interest expenses are tax-deductible, please consult your professional advisor.
5. Split eligible pension income with lower-income spouse or common-law partner
Pension splitting permits the higher-income spouse or common-law partner to share up to 50% of their eligible pension income with the lower-income spouse or common-law partner. Since high-income earners pay tax at a higher rate than low-income earners, shifting up to 50% to a lower marginal tax bracket will generally result in lower combined tax payable for the couple. In order to pension-split, a joint election must be filed within the filing due date of the personal income tax returns for the year. Hence, pension splitting occurs only on paper and does not actually require a transfer of funds between the two spouses or common-law partners.
Please consult with your accountant or tax expert prior to implementing any of these strategies.