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Paying taxes is a fact of life, but that doesn’t mean you can’t take steps to minimize your tax burden. Here are some of the best Tax Saving Strategies in Ontario:
A TFSA is a type of investment account that allows you to save money tax-free. The contribution limit for 2021 is $6,000, the same as it was in 2019 and 2020. If you’ve never contributed to a TFSA and have been eligible since its introduction in 2009, your cumulative contribution room will be $75,500 in 2021.
Contributions are made with after-tax dollars, and no tax is applicable when amounts are withdrawn, meaning that investments can grow tax free. TFSAs also offer some benefits over Registered Retirement Savings Plans (RRSPs). People can access their funds (depending on their investment category) and the amounts withdrawn can be re-contributed in the following tax year.
Your taxable income is reduced when you contribute to an RRSP. In general, you are permitted to contribute up to 18% of your earned income from the prior year, up to an annual limit ($27,830 for 2021). Tax-free growth is possible on investments made in the plan up until cash withdrawal.
The trick is to withdraw the funds in retirement when your income and, consequently, your tax rate may be lower. This is because the funds are designed to provide retirement income. If you make an RRSP contribution, your taxable income may decrease and your tax obligation may go down, depending on your financial condition. You might even get your taxes back.
Transferring money from a higher-earning spouse to a lower-earning spouse so they have more investment income is one of the objectives of a spousal RRSP. However, there are additional tax advantages to the technique. A pension can be divided at retirement or before retirement through the use of spousal RRSPs.
Within their allowed contribution limits, the higher-earning spouse would make contributions to the lower-earning spouse’s spousal RRSP. Because the spouse with the greater income would be eligible for a tax deduction in the year of contribution, this transaction could lower the couple’s overall tax rate. When the money is later removed from the RRSP of the spouse with the lower income, the tax due on the withdrawal from the RRSP could be less.
An IPP is a type of pension plan that is designed for business owners and incorporated professionals. It allows you to contribute more to your retirement savings than you would be able to with an RRSP. IPPs are best for people between the ages of 40 and 71 with a yearly T4 income greater than $100,000. If you’re an employer who wants to improve retirement benefits for a valuable employee, an IPP might be a good option to consider.
Another popular Canadian tax saving method used by high-income households is income splitting. To do this, you must redistribute your income within the family. For those older than 18, you might consider giving them employment income, dividends, or capital gains, which are generally taxed at a lower rate. This can help reduce the overall tax burden of the family. However, there are rules in place to prevent income splitting from being used solely as a tax saving strategy. It’s important to seek the advice of a financial professional before implementing any income-splitting strategy.
Life insurance can be a useful tool for tax planning, especially if you’re a business owner. If you have a business partner, you can use life insurance to protect your business in the event of your partner’s death. You can also use life insurance to fund a buy-sell agreement, which allows your business to continue operating smoothly if you pass away.
Real estate can be a lucrative investment, and it can also provide tax benefits. If you own rental property, you can claim expenses like repairs and property taxes on your tax return. You can also consider investing in a principal residence, which can provide tax benefits when you sell it.
If you sell your principal residence for a profit, you may be eligible for the principal residence exemption, which allows you to exclude some or all of the capital gain from your taxable income. However, there are rules in place that determine which properties are eligible for the principal residence exemption, so be sure to consult with a financial professional before making any real estate investments.
There are many tax saving strategies available to Canadians, and the best one for you will depend on your individual circumstances. To make sure you’re taking advantage of all the opportunities available to you, consider seeking the advice of a financial professional.
At BG Accounting and Business Solutions, we have a team of experienced professionals who can help you save on taxes and manage your finances effectively. Contact us today to learn more about how we can help you. Tax Saving Strategies Tax Saving Strategies