Paying income tax out of your income is a federal law. Understand your personal situation and the basic of the income tax laws will help you to reduce the risk of overpaying. We all want to be fair, but we don’t want to pay when we do not need to. In this article, we will discuss how to reduce your income taxes.
I. Reduce your taxable income 1) Employment income. a) Contribute maximum amounts to your 401K or registered retirement saving plan, borrow them, if necessary depending on your affordability. b) Keep track of all child care expenses. The Canadian government allows you to deduct up to 2/3 of your working income for lower income spouse. c) Keep track of all learning programs spending for children, such as hockey lessons. d) Keep track of all medical expense,such as group insurance, you can deduct from your taxable income for any amount over 3% of your income.
2. If you are self employed a) Keep track of all business expense receipts b) If your spouse and children help in your business, pay them, according to the amount allowed. c) If you manage your rental home, you can pay yourself for managing service, according to the amount allowed. d) Keep your car miles and gasoline paid receipts. e) Keep track of your business lunch and entertainment for your customers. f) Business home expenses, if your business requires you to work at home sometimes. g) Gift for your customers for your business. h) Other business office expenses such as stamps, rent, etc. i) All of 1) if applicable
II. Reduce your effective tax rate a) Adjusting your portfolio so you receive more dividend income than interest income (dividend income is not taxed until it is taken out of your portfolio and they have tax preferred status) b) Establish an educational trust for your children, or a spousal RRSP for income-splitting.
III. Defer your taxable incomes a) Unrealized capital gains are not taxable until assets are sold. b) Contribute to your 401K or registered retirement saving plan until retirement or when you have no income.