Most of us are obligated to pay taxes, but there are things you can do now to help manage your tax burden this year and for future years to come. Whatever your net worth, a sound tax strategy is an important component of your personal financial standings. Here are five tips to consider as you work toward reducing your tax obligations this year.
Tip #1: Contribute to Your RRSP
A Registered Retirement Savings Plan (RRSP) is beneficial in two ways - it can reduce your taxable income and grow your money between now and retirement. The money you contribute to your RRSP is tax-deferred, meaning you won’t be required to pay taxes on it until withdrawals are made (presumably in retirement). By contributing to your RRSP, you are reducing your taxable income for the year. Lowering your taxable income is an effective way to help reduce your overall tax obligation for the year.
Tip #2: Claim Eligible Medical Expenses
You may be able to receive non-refundable tax credits for eligible medical expenses made throughout the year if certain criteria are met. These expenses must be eligible in accordance with government guidelines, and they can range greatly. They will need to have been made during the tax year and not previously reimbursed (unless the reimbursement counts as part of your income).
Expenses will need to either account for three percent or more of your income or be above $2,397.1 When filing, you may claim eligible medical expenses on lines 33099 and 33199 of your tax return.
Tip #3: Avoid Late Filing Penalties
It’s an obvious tip but one that shouldn’t be overlooked - pay and file your taxes on time to avoid unnecessary fees, penalties and interest. Typically, balances owed for the current tax year are due April 30. If you do not pay by then, interest will begin accruing on the amount owed starting May 1.2 Similarly, if you pay instalments on taxes owed, missing an instalment due date may result in the accrual of instalment interest.
Filing your taxes late will result in a five percent penalty on the balance owed, plus an additional one percent every month in which you do not file - up to 12 months.2
Tip #4: Deduct Eligible Employment-Related Expenses
The majority of employees in Canada likely don’t qualify for any employment-related deductions. But under certain circumstances, you may be able to use it and should determine eligibility before filing. This deduction is for those who are required to make certain purchases by their employer and are not given an allowance to do so (or the allowance is counted as income). It is not for “normal” work expenses such as commuting, work clothes and other personal tools.
Some adjustments were made to the 2020 tax code to accommodate COVID-related work-from-home changes. For eligible employees who worked at home due to COVID during 2020, certain home office expenses may be eligible for a deduction.3 The Canada Revenue Agency can provide more insight on eligible and non-eligible expenses for this deduction, as well as your tax professional.
Tip #5: Consider Pension Income Splitting
Under certain circumstances, splitting your pension income with your spouse may provide a tax advantage. Eligible individuals may split up to 50 percent of their pension income with a spouse. This can be advantageous if one spouse makes significantly more than the other, or one is retired and the other is still working. This can be a tricky situation to navigate, and it may be beneficial to discuss this option with an advisor before going forward.
If you don't already, working with a financial professional may be one of the most important aspects of your tax strategy. They can help figure out which of the mentioned tips above could help you save on taxes owed this year, as well as balance your current tax obligations with what you may be required to pay in retirement.