Twelve tips to lower your tax bill in 2023
Most Canadians only think about their taxes when they file in March or April, but by then it’s often too late to take advantage of the many tax-saving opportunities out there. Minimizing the tax on your hard-earned income is something you should pay attention to year-round. So what can you do today to lower your next bill? Here are 12 ideas.
1. Make the most of registered accounts.
For many, the biggest annual tax break comes from contributions to their Registered Retirement Savings Plan (RRSP). Every dollar you put into this account up until next March can be taken off your 2023 taxable income. The same is true for contributions made in calendar 2023 to the new Tax-Free First Home Savings Account (FHSA), although with this account the withdrawals are also tax-free as long as they’re used to help pay for a first home. Other tax-advantaged accounts such as Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) don’t offer the same up-front savings on your 2023 return, but they do allow you to grow your investments tax-free. A financial advisor can help you sort out which registered accounts will work best for you.
2. Write off your losses.
No one likes to lose in the market, but if you hold assets in non-registered accounts, and sell shares of a company at a loss, you can still make money. How? Because part of the loss can be used to offset any capital gains taxes. In other words, if you need to pay $1,000 in tax after selling an investment, dump a poorly performing asset for an equivalent loss. Then you won’t have to pay any tax at all. (You will have to properly document and declare the loss on your tax return.) If the loss is greater than realized gains in 2023, you can carry the net loss forward to offset future gains, and therefore save taxes in a future year, or carry it back up to three years to offset past gains and reduce taxes paid in a previous year.
3. Keep complete records.
One big reason people pay more tax than they should is because they don’t have the receipts they need to take advantage of a credit or deduction. Fortunately, keeping track of receipts has never been easier. There are several apps that let you take a picture of a bill or expense and quickly categorize that spending. Also, keep track of any tax-related forms or slips you’ll need, such as your T4, which lists how much money your employer paid you during the year. (It usually comes in the mail from your workplace, or you may be able to access it online.) Keep things straight so that come tax time you’ll have everything you need to help you cut your tax bill.
4. Know your credits and deductions.
There is no shortage of tax credits and deductions to take advantage of: the former cut down the amount of tax you have to pay, while the latter reduce your taxable income, which could also result in a lower bill. Generally, you’ll find deductions and credits covering things like child care, caregiving for parents, spousal support, out-of-pocket medical expenses, adoption, education, disabilities, pensions – the list goes on.
There are some key ones to keep in mind, especially these days. Since the pandemic, you’ve been able to deduct home office expenses, even if you’re not self-employed. How much depends on different factors, so it’s a good idea to talk to a tax professional before filing. You can also deduct a number of moving expenses if you’ve had to move to within 40 kilometres of a new job or business. It’s a good idea to familiarize yourself with the list of deductions and credits you can claim, which you can see here.
5. Separate personal and business expenses.
If you have business, property rental or self-employment income, get in the habit of separating personal and tax-deductible business expenses. Why? Because there are many business expenses you can write off that won’t apply to personal taxes. If the Canada Revenue Agency (CRA) does an audit on your business, you’ll need to show them the receipts. If you, say, use the same credit card or bank account for personal and business, it can get confusing come tax time to figure out which expenses were for what.
Fortunately, separating the two isn’t difficult. Start by getting a separate credit card for business purchases. Then consider getting a business bank account to deposit your income into, some of which you can then transfer into your personal account every month. Most incorporated businesses already do this, but it’s a good idea for sole proprietors too.
6. Use professional software.
There are a growing number of accounting and tax-filing programs out there to help you keep track of all your tax-deductible expenses and contributions throughout the year. Consider using a budgeting app, too, which can easily categorize spending into, say, travel, entertainment, work expenses and more. Some programs will even let you submit your tax forms to the CRA yourself.
7. Hire a pro.
Even if tax software is getting easier to use, it’s still a wise idea to hire a professional to help make sure you’re paying the tax you owe and not a penny more. If you run a business, consider hiring a bookkeeper who can keep track of your bills and stay on top of all of your expenses and income. An accountant can do more complex work, but can also make sure you’re getting the paperwork needed to claim deductions and expenses. Your tax savings may even cover the cost – and their services are often tax deductible.
8. Hire a family member.
Our progressive tax system means that the more you earn, the higher your tax rate. But there are opportunities for “income splitting” – transferring income from a higher-earning partner to a spouse or grown child in a lower tax bracket. One way is to hire the lower-earning family member to perform tasks for the benefit of your business. What you pay them is deductible as a business expense on your return, and they will end up paying tax at a lower rate. Note that the compensation must be reasonable for the work they’re doing, or you risk attracting an audit.
9. Make your tax planning family-friendly.
As well, where possible, the lower income-earning spouse could invest their earnings in a non-registered account, and the higher-income spouse could use their earnings to cover household and family expenditures. The advantage of this approach is that income and capital gains from the non-registered account held by the lower income-earning spouse will be taxed at their lower rate.
A financial advisor can help you sort out the tax-saving opportunities available to your household.
10. Optimize the principal residence exemption.
Your principal residence – the home you live in most of the time – enjoys a capital gains exemption in Canada. That is, you don’t have to pay taxes on the amount it has risen in value when you sell it. (You still have to report it on your tax return, however.) If you own more than one property, consider which property is likely to appreciate most in dollar value, and then claim the principal residence exemption on that property.
11. Keep track of your charitable donations.
Donations to registered charities in Canada are available for tax credit. Depending on your tax bracket and province of residence, you can save up to 49 cents in taxes on every dollar you give. So instead of dropping toonies into a collection box, make your giving count. And make sure you get an official tax receipt for every contribution, as the CRA requires you to itemize every donation.
12. Adjust your gifting strategy.
There are other ways to support a charity beyond cutting a cheque or transferring funds. Another option is to donate securities in kind, such as mutual funds, ETFs, etc. When you donate securities in kind, you don’t pay any capital gains tax when they are sold, yet you receive a tax credit for the full market value.
Another tax-saving approach might be to try to pool donations with your partner to optimize tax credits.
It’s hard to concentrate on taxes year-round when you have so much more to worry about, but making it part of your regular budgeting and bookkeeping can ultimately save you time, stress and money. Keep this page bookmarked, if necessary, for regular reference. And keep an eye out for tax changes and new deductions as they come into effect, as the FHSA did this year. If you need motivation, use this calculator to estimate your savings.