Tax-Effective Strategies in Canada
Some newcomers are surprised to learn the amount of taxes Canadian residents pay. Yet, it’s these taxes that ensure we live in a country with good benefits, free education for our kids, and public resources. So how do you pay less taxes?
Residents of Canada must pay income tax on all income received throughout the year.
Each year by April 30th, each person must submit an income tax return to inform the government of how much money you’ve earned and how much taxes you’ve paid. If you paid too much taxes, you will get a refund. If you paid too little, you will have to pay more. We would recommend the assistance of a tax professional, such as an accountant, to help with your annual income taxes.
We, along with your tax professional, will want to educate you on how the Canadian tax system works. We will provide guidance on how some tax credits and deductions can help reduce the amount you pay to the Canadian government. Some examples of tax credits are bus passes and children’s fitness programs. Business owners can write off many expenses, such as cell phone, advertising, lunch with clients, maybe even mortgage expenses if you work from home. We will also want to position your income and investments in the most tax-effective way in order to increase those government benefits which your family receives.
You have to report all sources of income, inside and outside of Canada. If Canada has a tax treaty with the other country, you may get a credit for taxes you’ve paid there. The Canadian government also requires you to disclose any assets over $100,000 you hold outside of Canada. Personal income taxes must be filed by April 30, and business taxes by June 15th. For business owners, some strategies include splitting income with your spouse, if your spouse has no or lower income. Couples may pay less taxes overall if income levels are similar vs. higher taxes when one person pays all the income taxes.
If you are working more than one job, we recommend you request your employers take additional taxes off your paycheques to ensure sufficient taxes are collected based on all income sources. The higher your income, the more you will be taxed. We can provide guidance and alternatives based on your financial situation.
Every permanent resident should file taxes, even if you don’t expect to owe taxes or get a refund. Filing taxes allows you to obtain RRSP deduction room, monthly Canada Child Benefit, and annual Tax Free account contribution room that allows you to put money into a tax-free investment account to grow without tax implications. For low and modest income families, filing taxes will get you the Goods and Services Tax/ Harmonized Sales Tax (GST/HST) credit, which is often paid quarterly to eligible tax payers.
International students who intend to remain in Canada after their studies should also file their taxes, even if you do not have an income. By filing taxes now, you will be eligible to claim education tax credits which can be used to offset taxes when you start working in Canada in the future. Even if you didn’t file your taxes during your student years, we recommend you go back and file them when you start working in Canada.