One week before last year’s income tax deadline, an H&R Block survey found 23 per cent of Canadians had still not filed. About a quarter of the laggards expected to miss the deadline and four per cent were not going to bother.
For the overwhelming majority who are well ahead of this year’s April 30 deadline to file their 2024 tax returns comes extra time to scour for tax savings that could continue beyond the current tax year.
How the income tax system works
A basic primer on the Canadian income tax system illustrates how lowering your taxable income can significantly lower your tax bill.
The amount of income tax Canadians pay is based on marginal tax rates that rise as income increases. For 2024, the first $15,705 of income is exempt from taxation. From there, it’s better to make less in tax terms.
Federal tax rates are the same for all Canadians, but Ottawa also collects provincial and territorial income tax on their behalf, and combined rates can vary across the country.
In Ontario, for example, the first $52,886 of income is taxed at just over 20 per cent. Income between $93,132 and $105,775 is taxed at 31.48 per cent, and income between $114,750 and $150,000 is taxed at 43.41 per cent.
Marginal tax rates exceed 53 per cent on income over $253,414. When you do the arithmetic, it’s not hard to see how lowering your income to a lower marginal tax rate can save big bucks.
There are many tax-saving strategies depending on your personal situation, so it’s best to speak with a tax professional.
For most Canadians, there are four basic ways to save on taxes:
Deductions and credits
Many day-to-day expenses accumulated throughout the year can be deducted dollar-for-dollar from taxable income. Others are eligible for tax-saving credits that recover a portion of the expense.
Many of the costs of doing business for the self employed are deductible, while credits are available for some expenses relating to health and childcare.
Be sure to keep documentation to back up your claims.
Registered retirement savings plans
The best way for most Canadians to lower their taxable income in the present and save for retirement in the future is by contributing to an registered retirement savings plan (RRSP).
The contribution amount can be deducted directly from your income and invested in just about anything.
Income splitting with a spouse
The biggest drawback to an RRSP is that it will be fully taxed when it is withdrawn; ideally in retirement when your income is at a lower marginal rate.
One way to avoid accumulating too much in your RRSP over the years and falling into a tax trap in retirement is by splitting your income with a lower-income spouse.
Taxpayers over 65 years old can split up to half of their taxable income with a spouse.
A spousal RRSP allows younger Canadians to contribute to their spouse’s RRSP and deduct the amount from their taxable income.
There are limits to how much you can contribute to either RRSP, so you might want to keep some of that contribution space for future years when you are pulling in bigger bucks.
Work less
Perhaps the most overlooked and efficient way to lower your taxable income is to semi-retire and simply work less.
There’s even a way for Canadians to avoid the high taxes that come with overtime pay. Most provincial labour laws require employers to pay time-and-half for hourly workers who work extra hours.
But they also require them to offer time off in lieu (one and a half hours for every hour of overtime) as an alternative.
If you choose the money, your taxable income will increase – perhaps to a higher marginal rate. If you choose time-in-lieu, the government has not devised a way to tax leisure time – at least not yet.
