Who pays the most income tax in Canada?
Feel like you’re shouldering a heavy tax burden? You may be—the top 20% of income-earning families pay 61% of the country’s personal income taxes. On top of federal income tax, we all pay provincial income tax, which varies depending on where you live. But being in a high tax bracket may not be such a bad thing. After all, it’s an indicator that you’re doing well. (Plus, there are some great ways to reduce the taxes you owe with various tax credits offered by the CRA.)
Either way, there’s no getting around paying taxes entirely (that’s called tax evasion, and it’s illegal), tax minimization, on the other hand, is perfectly legit. That starts with looking at ways to reduce your taxable income.
What is taxable income?
First things first, let’s explain taxable income. Start with your gross income (that includes money such as wages, bonuses, investment income, side gigs, etc.) and subtract any tax deductions or credits (these could include moving expenses, medical expenses, or caregiver credit, etc.) you’re eligible to claim. That final amount is what you’re taxed on. So, obviously, reducing your taxable income means there’s less income, overall, to tax.
You can do that in several ways, whether you receive a yearly salary or own a business.
How to reduce your taxable income as a salaried employee
As a salaried employee, your employer deducts income tax from your gross pay. Do you ever look at what your paycheque would be without that deduction? Imagine the possibilities! While there’s no magic wand to fix that, there are tax-saving strategies to make the most of what you earn and reduce your overall taxable income. These include:
1. Max out
We all know Registered Retirement Savings Plans (RRSPs) are a valuable tool to help save for retirement, but maximizing your contributions is also a great way to reduce your taxable income. Contributions are deducted from your income when you file your tax return. And, depending on your tax bracket, you could get anywhere from 20% to 50% of your contributions as a tax return.
Use employment expenses to your benefit
Another way to reduce taxable income is to claim eligible employment expenses. If you use your home office for work more than 50% of the time, you may be able to claim a portion of your rent or mortgage payments, utilities, and home maintenance costs. Use your own vehicle for work purposes? Track your kilometers and keep a detailed mileage log—you may be able to claim a portion of what you pay for fuel, maintenance, insurance, or leasing on your taxes.
You’ll need to get your employer on board by signing a Declaration of Conditions of Employment form (a T2200) to support your claim.
3. Bridge the divide
Have family members in lower tax brackets? Consider income-splitting strategies: A spousal RRSP allows a couple to split their RRSP income during retirement and enjoy lower marginal tax rates; while a prescribed rate loan lets you transfer some of your high-net-worth income to lower-income family members.
How to reduce your taxable income as a business owner
Being a business owner has some perks beyond just a dedicated parking spot. There are also significant tax-saving strategies that can help lower your overall tax bill.
4. Keep your receipts
As a business owner, you can deduct business costs related to starting up your business— and keeping it running. Expenses must be supported by original invoices and can include things like office supplies, salaries, wages, benefits, and advertising.
Self-employed and working from home? You can write off a percentage of your rent, internet, or electric bills, since these expenses are integral to running your business.
5. Consider incorporation
One of the best ways for business owners to reduce taxes is through incorporating your business. If you’re generating more profit than you need to live on, you can redirect those profits into your corporation, where they are taxed at the lower business tax rate (about 12%, depending on your province or territory). The money you save in taxes can be invested through your corporation.
Note that you will be taxed later when you withdraw the money. But in the meantime, you can enjoy tax-deferral benefits and redirect funds to investments you don’t need to access right now.
6. Discover life insurance
You know you need it to protect your family and your business, but what you may not know is that life insurance can also be a tax-advantaged way to save and invest money. Premiums for a corporate-owned life insurance policy are paid with corporate after-tax dollars, which are taxed at a much lower rate than your personal tax rate. Not only that, but the savings component of the policy can grow over time on a tax-free basis. Upon death, a significant amount, if not all, can be paid out to the shareholder’s estate, also tax-free.
Owe less with smart tax-saving strategies
There’s no way around taxes, but there’s also no need to pay more than you have to. Careful planning and tax-saving strategies will put a dent in your tax bill and help you keep more of your hard-earned cash where it belongs—in your pocket.
