April shower bring May flowers…and a stark reminder of the deadline to file your personal income tax by April 30th. Income tax in Canada is based on self-assessment, meaning taxpayers are responsible for figuring out how much they owe, and filing a return with the Canada Revenue Agency by the required filing deadline. A common question I’m asked (at a ladies party, at the grocery store, in line for the bathroom at the newest nightclub?) is “how can I reduce my overall tax bill?”
Here are a few helpful hints to get you started.
Maximize your RRSP contributions
Single-handedly the easiest way to reduce your taxable income is to contribute as much as your income will allow into your RRSP account. The money you put into your RRSP is not taxed by the government until it is withdrawn, and the funds grow tax free, which maximizes its growth during your peak income earning years. The more you do this, especially in your younger years, the greater the effects of compounding are within the account and the greater your retirement nest egg will be; a nice side effect of the original goal of reducing your tax bill.
RRSPs 2.0 – Maximize your TFSA contributions
Consider your TFSA to be like simple and homely cousin of the RRSP...a nice afterthought but not quite the real thing. While contributions to a TFSA are made with after tax dollars, the growth of your money within a TFSA account is tax free. Given the power of compounding you should have more money at a later date, the withdrawal of which will not be taxed even then.
Be aware of deductions
There are many-a-deductible expense that the average Canadian is not aware of which can help reduce the amount of income to be taxed. One example would be the additional cost of gluten-free foods for patients with Celiac disease (as opposed to those of us who thought a gluten free diet would help us look like Victoria Beckham). Another example would be orthopedic shoes, boots and inserts when prescribed, not when requested by you to make your four inch Louboutin’s more manageable for a night out. There is an all-encompassing list on the CRA website which is normally updated so a quick visit to the site would be a good bet.
Be aware of credits
A tax credit is a tax incentive which would allow you to subtract the amount of credit from the amount of tax owing, as opposed to the income on which you will be taxed. There are certain new and innovative ones such as the children’s fitness and arts tax credit, which allows you to claim a certain portion of the fees you pay for certain art/cultural/and or physical activities for children under the age of 16. There are some that have been available longer, like the disability tax credits, which are often overlooked because the broad spectrum of what is eligible is not always typically associated with a disability. For example, learning disabilities for which extra tuition is required, mood disorders, and diabetes, while not considered a disability per se, may provide the opportunity for the use of a disability tax credit.
While you may not think your tax return is complicated, I always suggest using a professional accountant you trust to help you file your tax return. Accountants are required to stay up to date with the CRA regulations, so your best bet if you are unsure about something is to get some help with your filing. To a good financial future!
