Tax Perks and Considerations

Thursday, June 21, 2012

Canadians like to save their money!  Even though we do pay tax to the Canada Revenue Agency on any income that we have made, there are some ways in which Canadians can keep more of their money.  Canadians are taxed on what is considered their taxable income.  There are methods to decrease one’s taxable income. 

The government of Canada has set aside some ways in which we can save our own money.  A Registered Retirement Savings Plan (RRSP) allows people to put money into the account and earn interest tax free.  The drawback are that an RRSP will be taxed when that money is taken out (such as first time home ownership or retirement). 

Another way in which Canadians can save their own money is with a Tax Free Savings Account (TFSA).  Canadians are eligible to put $5000 into a TFSA annually and all the interest it earns is tax free.  You can have stocks that pay dividends.  Any monetary gain is tax free (such as putting stocks inside your TFSA). 
If you have investments and make monetary returns on those investments, one way to decrease the amount that you will be taxed on it would be to have the investment pay you dividends as opposed to interest.  You have to pay income tax on the interest but you don’t have to pay as much on the dividends.  Interest can also be earned from these investments but you will be taxed on this in your tax bracket (i.e.  If you are in a 30% tax bracket then you will have to pay 30% interest).   If your soul income is based on investment income (such as being retired) it would be wise to get paid out from dividends as you are able to take out $30,000 in dividends without being taxed.  

If you have capital gains (when you sell investments/non principal residence home/investment property for more than you paid for it) you will have to pay income tax on the amount of the capital gain.  A capital loss (when you lose money on an investment that you have sold, i.e.  If you pay $10 for an investment and you sell it for $5 you therefore have incurred a capital loss of $5).  The year that you have a capital gain you can apply a previous capital loss to that capital gain, thereby decreasing the amount of income tax you will have to pay on that capital gain.

For those that have a business, or gain income through self-employment methods there are taxable benefits.  Tax perks such as having deductions for expenses may help in lowering the taxable income that the company has (thus decreasing the amount of income tax you may have to pay).

One final consideration might be for those that are considering moving or retiring.  If you are getting ready to retire or move you may want to consider the province of residence.  Some provinces have different personal income tax rates.  Alberta is among the lowest for personal income tax. 

Being smart with how you save your money may help you in decreasing the total amount of income tax that you will have to pay on your money!