Tax-filing season is here again – the Canada Revenue Agency started accepting 2021 income tax returns on February 21, and most Canadians have to file their return and pay any balance owing by April 30.
Financially savvy Canadians are always looking for ways to reduce their tax bill. Whether it’s with tax credits and deductions, or effective financial tips and strategies, there are many things individuals can do to manage their tax burden.
Here’s a look at five ways you might be able to follow to bring down your tax bill this filing season.
Claim home office expenses, even if you’re a salaried employee
Self-employed Canadians who work from home offices have long been able to deduct a portion of their expenses for utilities, services, and other costs. Since the COVID-19 pandemic forced millions more Canadians to work from their homes, the CRA has broadened the eligibility for home office deductions. Anyone who worked at home more than 50 per cent of the time for at least four consecutive weeks in 2021 can claim $2 for each day worked at home in the year, up to a maximum of $500.
Claim any applicable benefits, including the Canada Workers Benefit
This year, the income threshold to qualify for the Canada Workers Benefit has increased by nearly a third, to just over $32,000. Additionally, the federal government has also increased the qualifying threshold for combined household income and added a new ‘secondary earner exemption.’ As a result, many more low-income taxpayers will be eligible for support through this benefit, which provides up to $1,395 for individuals and $2,403 for families.
Borrow to invest
Unlike car loans or credit card debt, interest on money borrowed for the purpose of investing is tax deductible, making it easier to grow your long-term wealth even if you don’t have a ton of extra cash to invest. Give your nest-egg a boost by borrowing, and get a tax break on the loan interest too. One important caveat, of course, is making sure the money is invested wisely, because you’ll have to repay the loan even if the value of the investment declines.
Save on taxes now with an RRSP contribution, save on taxes later with a TFSA contribution
When you contribute to a tax-free savings account (TFSA), the income your investments earn is sheltered from taxes. You can withdraw any amount at any time, and there’ll never be a penny in tax owing.
Conversely, when you contribute to a registered retirement savings plan (RRSP), your taxable income for the year is reduced by an amount equal to the value of your contribution, lessening your immediate tax burden and, in some cases, allowing taxpayers to reduce their income enough to qualify for a lower marginal tax rate.
However, it’s important to remember that RRSP contributions and the income they generate are taxed when the money is withdrawn in retirement. Still, for most people, the tax rate they pay in retirement is less than it was in their higher-earning working years.
Make a charitable donation
Federal, provincial, and territorial governments all offer tax credits on money donated to charitable organizations, but giving cash isn’t the only way to generate a tax break through gifts and donations. It’s also possible to gift publicly-traded securities and their accrued capital gains to a registered charity or foundation. Doing so not only entitles the giver to a tax receipt for market value of the security, but also removes the obligation to pay tax on the capital gain.