Taxes are inevitable financial instruments that can lower your income. If you earn income in Canada, there’s no doubt that you will have to pay taxes. Thankfully, some tax laws in Canada offer options that can help Canadians pay lower taxes, such as investing in tax-deferred savings plans like RRSP, RESP, and TFSA.
Tips on How to Reduce Tax Payments in Canada
Taxes can be overwhelming if you don’t know how to maneuver your payment options to reduce the taxes. Here are some of the tax-saving tips that can limit your exposure to tax.
1) Invest for Education in RESP
An RESP is a Registered Education Savings Plan that helps Canadian parents save for their children’s post-secondary education. As a tax-advantaged savings plan, it allows your investments to grow tax-free during the entire period of savings (up to 17 years).
If you have kids, you need to take full advantage of this savings plan, not only to reduce your taxes but also to secure your kids’ future. All the money in your child’s RESP account will not get taxed, including the interests earned and the government grants earned.
In fact, it’s the Canadian government that will reward you with a 20% grant on your annual contribution up to CA$2,500 instead of you paying taxes. However, the maximum amount of money you can save in RESP is CA$50,000 per beneficiary.
Thankfully, there are many RESP providers in Canada. To find a company that offers the most favorable deals, you can read the Heritage Education Fund Reviews.
2) Invest for Retirement in RRSP
If you care about your life after retirement, you should start saving for it in an RRSP. It’s a Registered Retirement Savings Plan that Canadians use to save for retirement. Most importantly, it’s a government-sponsored plan that allows your money to grow tax-free.
It’s no doubt that many private financial institutions provide retirement savings plans, but most of them may tax your savings. So, you should take full advantage of the tax-deferred RRSP that will allow your initial investment and capital gains to accumulate tax-free.
However, the contribution limit for an RRSP is 18 percent of your previous year’s income or the maximum set by the Canada Revenue Agency (CRA) for the current tax year. Over contributions may attract a one percent monthly penalty on the excess amount.
3) Open a TFSA and Contribute to the Account
A TFSA is a Tax-Free Savings Account that also allows Canadians’ investments to grow tax-free. However, it has a contribution limit/room that restricts from investing more than what you ought to save. The TFSA limit for the year 2020 is CA$6,000.
Unlike other registered savings plans that are purpose-specific, TFSA allows you to save for a vast range of functions, like birthday parties, weddings, vacations, and many others. Thankfully, you can withdraw your money at any time, even during emergencies.
4) Purchase a Home Using a Home Buyer’s Plan
Did you know that you can borrow part of the money in your RRSP account and use it to buy a new home without getting taxed? The strategy is known as the ‘home buyers plan.’ It allows you to use your RRSP funds to make a down payment.
However, the maximum amount of money you can borrow from your RRSP account to buy a home is CA$25,000. Note that it’s a borrowed money, and you’ll have to refund it to your RRSP account. Ensure that you repay the money on time.
5) File All Your Taxes on Time
Filing your tax returns on time can help you avoid late fees and penalties. If you file your returns after the deadline, the CRA will ask you to pay a five percent late penalty and a one percent interest every month afterward. You can check the tax filing deadlines on the CRA website.
Now that you know some of the most useful tips to keep your taxes down, you need to implement them all. Take full advantage of government-registered savings plans for your savings to grow tax-free. Most importantly, ensure that you understand your tax situation to reduce your exposure to risks associated with taxes.