One of the most common questions we receive regarding personal taxes is, ‘How can I save taxes?”.
With tax season just around the corner, it is time to start considering what you need to file your personal taxes and ways in which you might be able to reduce your personal tax burden.
Registered Retirement Savings Plans (RRSP’s)
Contributions to a Registered Retirement Savings Program are deductible in the year purchased or if purchased within 60 days into the following year. If you purchase an RRSP on or before March 1, 2022, it can be a deduction on your 2021 tax return. It is important to note that, it can only be purchased within the first 60 days to be eligible for the current year. Although this is not the case this year, it is important to be careful on leap years because the deadline in a leap year will be February 29th.
When you contribute to an RRSP either during the year or within the first 60 days of the new year, you can expect to receive an RRSP deduction slip from your financial institution. You will need to provide a copy of this slip to your tax provider so that they can claim the appropriate deduction on your tax return. RRSP contributions can be deducted against most other types of personal income including employment income, dividend income, interest income, business income, farming income, and rental income. The RRSP deduces your taxable income dollar for dollar and is the most helpful at reducing taxes with taxpayers in the higher tax brackets. The highest federal tax bracket of taxable income over $216,511 will see a tax reduction of 47 cents for every dollar they contribute, while the lowest tax bracket of income under $49,020 will see a tax reduction of 15 cents for every dollar they contribute.
The amount you can contribute to your RRSP’s for a given year is limited to your unused RRSP contribution limit which is available on the bottom of the prior year’s Notice of assessment or on CRA’s My Account.
In contrast, if you withdraw money from your RRSP’s during a calendar year, it will be considered income in the year it is withdrawn. You will receive a T4RSP slip from your financial institution and you must include this income on your personal tax return. Your financial institution will withhold tax when you make the withdrawal which will go towards the taxes owing on that income, but it is important to note that, depending on your other income and deductions, the tax withheld may not be sufficient to cover the taxes generated on the RRSP withdrawal and you may end up with taxes owing for the year.
While contributing to your RRSP’s can help you to defer tax by deducting it against your current income and not being taxed on it until a later when you withdraw it again, it can also help you to permanently minimize taxes too. If you are contributing to RRSP’s while your taxable income is higher such as during your working years, you are getting the deduction at a higher tax rate. Later, if you withdraw the RRSP’s out when your income is lower such as when you are in retirement and paying taxes at a lower rate, you can save on the total amount of tax on that income.
Tax Free Savings Accounts (TFSA’s)
TFSA’s were introduced in 2009 to allow extra savings to be invested without paying tax on the income earned by those investments. Funds can be invested in GIC’s, stocks, and mutual funds, among other things. Any income earned on funds invested in TFSA’s, including interest, dividends, capital gains, etc. is not taxable.
While contributions to your TFSA’s are not deductible against other income in the year they are contributed, they can be used to reduce taxable income from investments in future years. You will not receive any slips for contributions to your TFSA’s in a given year, but should receive statements from your financial institution indicating any income earned on those funds. These are not needed for preparing your personal taxes.
Contributions to your TFSA’s are also limited to a specific amount and grow each year. You can find your TFSA contribution room on your Notice of Assessment and in CRA’s My Account. Similar to RRSP’s, CRA will apply penalties for over-contributing to your TFSA. If you were 18 or older in 2009 and have never contributed to your TFSA, your limit should be $69,500.
When funds are withdrawn from a TFSA, they are not considered taxable income and are received tax-free. Also, the amount withdrawn will increase the contribution room in the account. CRA recalculates the contribution room on an annual basis and it is up to the taxpayer to keep track of changes during the year.
Donations can also help to reduce your taxes in a given year while simultaneously helping charities and community groups. All donation receipts must have the name of the organization, date, location of the organization, unique serial number, CRA registration number, name of the donor, amount of gift, and CRA website. Donation slips are required to deduct donations on your tax return.
All the donations made in the current year plus any unclaimed donations for the previous 5 years can be added to your return. The total amount donated, less $200, up to 75% of your net income, are eligible for a tax credit. If large donations are made in a year, this can save significant taxes.
Any unused donations can be carried forward, and there are no penalties for over-contribution.
For more information please contact our office or visit the following CRA sites: