- Open registered tax saving accounts (RRSPs and more)
- Keep a record of expenses before tax filing
- Know your tax credits and tax deductions
- File taxes early to maximize returns on investments
- Capital gains and losses
- Know your tax forms
- Know your tax terms
- Taxes when you are getting married … or divorced
- Real estate tax ideas if you are a homeowner or planning to buy a house
- FAQs
Thank William Thomas White the next time you have to pay income tax. It was Sir Robert Borden’s minister of finance who brought the concept to Canada in 1917 to help subsidize the war effort. Fewer than 10% of Canadians paid income tax that first year, but by the war’s end in 1918, the new tax had raked in about $8 million, which amounts to roughly $142 million today. (Income tax brought in almost $200 billion in revenue in 2022.)1
What may not have changed since then is our general enthusiasm (or lack thereof) for paying income tax, even though the money raised helps the country run. Fortunately, there are ways to reduce your taxable income, and, while you still need to pay up, the goal should be to hand over only what’s required and not a penny more. Here are some ideas to consider.
Open registered tax saving accounts (RRSPs and more)
The government certainly has operating expenses to cover like infrastructure and healthcare, but it also wants to encourage you to save for important priorities like retirement or your kids’ education. To do that, it has set up incentives in the form of registered savings accounts where you have the potential to grow your money in a tax efficient manner. Here is a look at some of the most common accounts.
Registered Retirement Savings Plan (RRSP)
The retirement-focused RRSP continues to be one of the most popular investment accounts in the country, and for good reason: The funds invested are allowed to grow without any tax consequences. At the same time, contributions reduce your net income, which may give you a hefty tax refund that you can then put back into the account. As the name suggests, RRSPs are designed to help you save for retirement. You will pay tax on withdrawals from your RRSP, but since your income will presumably be lower in retirement, the taxes should be lower too.
Tax-Free Savings Account (TFSA)
Contributions into this account are not tax deductible the way they are with an RRSP, but your investments do grow tax-free. The key benefit is that you can withdraw money from your TFSA whenever you need it, without ever having to pay tax. Plus, you can also reclaim contribution room in the following year, giving you ample opportunity to grow your money. That makes it a great way to save for short- and long-term goals.
Registered Education Savings Plan (RESP)
Post-secondary education can be expensive so it may be wise to save in advance. You can open an RESP for your child as soon as they obtain a Social Insurance Number. Maximum lifetime contributions are $50,000 but many people make smaller contributions annually as the child grows up. As an added incentive, 20% of the first $2,500 of your contributions each year gets matched by the Canada Education Savings Grant (CESG). Contributions are not tax deductible, but the investments grow tax-free. When funds are withdrawn, the beneficiary — the student — is taxed, and since they are not typically earning a high income, that should be negligible.
First Home Savings Account (FHSA)
The newest registered account on the block can help you save for a first home. The FHSA is a cross between an RRSP and a TFSA. Contributions are tax deductible, like an RRSP, but withdrawals, if they are used for a qualifying home, are not taxed at all, like a TFSA. Investments within the account also grow tax-free.
Keep a record of expenses before tax filing
No matter your employment status, there are a range of expenses you can claim to reduce your annual income tax bill, including eligible business and medical expenses. But if you hope to take advantage of them, it helps to keep careful records over the course of the year and hang onto your receipts. Expenses claimed without documented proof can get you into trouble with the Canada Revenue Agency (CRA).
Know your tax credits and tax deductions
Generally speaking, a tax deduction gets subtracted from your taxable income, thereby reducing the amount of tax you will pay. A credit on the other hand gets subtracted from the amount owing. Both can work in your favour. Here are a few of the most popular tax credits and deductions:
Work-from-home tax deduction
For the 2023 tax year, the federal government has removed the “flat rate method” of claiming home office expenses, but there are two scenarios in which you can still claim this deduction:
- You are required by your employer to work from home and you did so for at least 50% of the time in 2023.
- Your home workspace is only used to earn employment income, and you use it regularly.
Investment losses
If you sell an investment in a non-registered account for less than you paid for it, it’s a capital loss. You can claim that loss against any capital gains earned in a non-registered account, offsetting the tax you may owe when you sell a stock for a profit.
First-Time Home Buyers’ Tax Credit
If you bought your first home in 2023, you could claim as much as $10,000 of your purchase price, saving you up to $1,500 in taxes.
Digital News Subscription Tax Credit
Designed to support Canadian journalism, this tax credit allows you to claim up to $500 for digital news subscriptions purchased from domestic media companies. International news aggregators which may include content from Canadian publications, do not qualify.
Canada Training Credit
Canadians between the ages of 26 and 66 who took an occupational skills course or a post-secondary school course during the year can claim 50% of eligible tuition and training fees, up to an annual limit.
Federal Political Contribution Tax Credit
Your contribution to a federal political party can be claimed for a credit of up to $650.
Medical Expense Tax Credit
Many medical expenses not covered under your provincial health care plan can be claimed under this credit, with some limitations.
File taxes early to maximize returns on investments
It can be easy to procrastinate about filing taxes, but there are some benefits to getting the paperwork out of the way early. Apart from removing the stress of missing the deadline, submitting early can help you get your tax refund quicker if you are owed one. If you expect to owe money this year, completing your taxes early also means you won’t end up accidentally paying late, which will result in penalties.
What is the tax return deadline in Canada?
The deadline for filing your 2023 income taxes in Canada is April 30, 2024. Self-employed Canadians, however, have until June 15 to file. If you do owe any taxes, even if you don’t have to file until mid-June, you must pay them before May 1 or you’ll start incurring interest charges.
How early can I file taxes Canada?
You can file your income tax return electronically, typically beginning mid-February. A word of caution though, you may not have all of the paperwork you need by then.
Capital gains and losses
Capital gains
When you sell an investment held in a non-registered account, and the value of that investment has increased from the purchase price, the profit you make is taxable. It’s called a capital gain. Capital gains are taxed at your marginal rate, which is determined by how much income you earn. But the tax is only applied to 50% of your total capital gain.
There are exceptions. Investments held inside registered accounts as well as the sale of your principal residence may be exempt.
Capital losses
A capital loss occurs when you lose money on an investment held in a non-registered account. While capital gains can be taxable, capital losses can help you reduce your taxes. You can apply any capital losses to offset capital gains earned in the current year. If there is an excess then you can use it in any of the preceding three years or carry it forward to any future year.
Know your tax forms
Here are the main income tax forms and documents you should look out for in the mail or from your employer.
T1 Income Tax Package
This is the basic form you use to calculate and submit your tax return. The T1 is also built into tax filing software, so it may not appear as an actual form. Line 15000 on your T1 reports your gross income (before taxes) for the year.
Notice of Assessment (NOA)
This is a summary of your tax filing from the previous year. Hang onto your NOA — it’s necessary for completing the following year’s tax return.
T4 Statement of Remuneration Paid
This is the document your employer sends you. It summarizes what you earned and what you’ve paid in income tax and deductions for things like Employment Insurance and the Canada Pension Plan over the course of the year.
T4A Statement of Pension, Retirement, Annuity and Other Income
If you’ve received payments from one or more of these sources of retirement income, you can expect to receive one of these statements.
T4E Statement of Employment Insurance and Other Benefits
If you received one or more Employment Insurance payments or were on parental leave, watch for one of these statements.
Annuitant Contribution Receipt
You need this to claim RRSP contributions. Your financial institution should send it to you.
T5 Statement of Investment Income
This applies to income earned from non-registered investments.
T3 Statement of Trust Income
This applies to income earned in mutual funds and trusts.
Know your tax terms
Even if you pay a professional to submit your income taxes for you, knowing the ways income can be recognized may help you find ways to lower your taxes next year.
Income splitting
Income splitting is a tax strategy that can help you and your family lower your overall tax bill by allocating income from the higher-income earner to lower-income family members. The goal is to decrease the couple’s overall taxes. This can be done by having the higher-income earner lend money to a lower-income partner through a low-interest spousal loan. Creating a family trust is another approach that allows taxpayers to allocate money generated by the trust to lower earners. If you do split your income, stay within the rules; the CRA will look for taxpayers who artificially use income splitting to reduce their taxes. Before adopting an income-splitting strategy, consider talking with a professional tax advisor or an accountant.
Self-employed
Being your own boss can come with perks, including when it comes to filing taxes. Self-employed people can claim a host of business expenses, such as office space, vehicle usage, work-related internet and much more, which can lower your taxable income. If you are self-employed, set aside money throughout the year so that you’re not stuck with a big tax bill you can’t pay. One popular rule of thumb is to save about 30% of what you invoice.
Incorporated small business
Incorporated small businesses can claim a range of expenses related to office space, vehicle usage and more. The small business deduction ensures that really small businesses have a chance to grow. If your net income is $500,000 or less annually, you may be taxed at a lower rate.
Taxes when you are getting married … or divorced
Married
- Spousal tax credit: If you supported a spouse/common-law partner who has a lower income, you may be eligible for some non-refundable tax credits. To qualify, your partner’s net income would have to be less than your basic personal amount.2
- Family tax credit: Couples with children under the age of 18 can claim a non-refundable income splitting tax credit of up to $2,000.
- Charitable donations: Your donations to registered charities will generate a non-refundable tax credit, which can be pooled with your spouse or common-law partner to get a larger tax credit if greater than $200.
- Medical expenses: You might be eligible for a bigger tax credit if the partner with the lower income claims all of the household medical expenses. It’s best for the lower earner to claim these expenses because the credit is based on a percentage of your income.
Divorced
Divorce has tax implications, too. Here are some things to keep in mind:
- Change in marital status: Report the change in your marriage status to the CRA to ensure you’re receiving the proper tax credits. You must be living apart from your former partner for at least 90 days for the CRA to consider you legally separated.
- Children: If you get divorced and have children under age 18, the CRA will recalculate your Canada Child Benefit and other tax credits.
- Legal fees: If you pay legal fees to enforce pre-existing rights for child or spousal support, you may be able to claim them on your tax return. The rules can be complex.
- Division of assets: There is a tax exception that allows a spouse to transfer money from their RRSP, RRIF, TFSA and Spousal RRSP to their former partner in the event of divorce. Other assets, like a cottage or income property, can also be transferred on a tax-deferred basis, meaning the taxes are only owed when the asset is sold.
- Support payments: Ongoing spousal support payments per court order or written agreement are taxable in the hands of the person receiving those payments and tax deductible for the person making them.
Real estate tax tips if you are a homeowner or planning to buy a house
Besides the First-Time Home Buyers’ Tax Credit, the most important thing to understand about real estate tax is that the federal government gives you an important exemption from capital gains tax if you sell your principal residence and are a Canadian resident.
If you earn rental income from one or more properties however, that’s taxable. (Yes, that includes short-term rentals of your home.) There are related expenses that you can claim on a rental property, such as mortgage interest, but it’s a complicated area that may be best explored with an accountant.
FAQs
What are five things that will affect how much tax you pay?
- Your income (from all sources, including realized capital gains from investments in non-registered accounts)
- Your marital status
- The number of dependents you have
- What tax credits you can claim
- How much you can claim in eligible expenses (e.g., medical)
What items have the highest tax?
The highest taxes you pay won’t show up in your annual tax filing. The so-called sin taxes — tobacco, cannabis products and alcohol — have the highest rates. Those taxes are applied at the time of purchase.
Who is taxed the most in Canada?
We have what’s called a progressive tax system. That means, generally speaking, higher-income earners are taxed at a progressively higher rate. Still, there are differences between the provinces. The province with the highest marginal tax rate is Newfoundland and Labrador, however that rate kicks in at an income threshold that is higher than many other provinces.
Which province in Canada has the lowest taxes?
Saskatchewan residents pay the lowest marginal income tax rate.
- Government of Canada, Annual Financial Report of the Government of Canada Fiscal Year 2021-2022, https://www.canada.ca/en/department-finance/services/publications/annual-financial-report/2022/report.html, Accessed February 26, 2024 ↩
- Government of Canada, Managing your finances as a couple, https://www.canada.ca/en/financial-consumer-agency/services/living-as-couple.html, Accessed February 26, 2024 ↩