The Tax Man Giveth and the Tax Man Taketh Away
How to Reduce Your Future Tax Bills
Earlier this month, I put together a list of easy-to-implement uses to spend your tax refund effectively. Now, let’s flip the script. If you are one of the 6.4 million Canadians who ended up owing money back to the Government of Canada this tax season, you may be considering methods to limit future tax exposure. Try employing the simple approaches outlined below to lower your future taxes owing as close to $0 as possible.
Rethink your current income tax structure. Ask payroll to increase the taxes being withheld.
If you realize you owe money at the end of the year, set up time with your payroll team. Ask payroll to withhold more taxes from your paycheques. If you do not have any additional sources of income to claim (which can impact this strategy), you will be able to increase your taxes monthly and reduce annual tax owed.
Do you have a retirement plan? Invest in your future by increasing your RRSP contributions.
If you have a group retirement program available through work, you can increase the amount being deducted directly from your paycheque. Completing your taxes in February can help you determine if you will owe taxes or be eligible for a refund. Prior to submitting taxes, you can adjust your RRSP contribution amount prior to the RRSP deadline (typically the first business day of March). If you owe taxes, this method allows you to contribute a lump sum payment to your RRSP account to lessen taxes owed—or even bring that bill to $0.
It is important to note that RRSP contributions reduce the tax based on your marginal tax rate. This means if you are in one tax bracket and your RRSP contribution lowers your income to a different tax bracket, the remaining dollars from your RRSP contribution will now be based on the lower tax rate.
Do you enjoy making a difference? Contribute to your favourite charities!
Registered charities provide a great way to give back to your community, while also benefiting your tax return*. I touched on the importance of making charitable contributions in the previous tax refund article, drawing attention to the importance of these organizations’ positive work in communities.
The Bottom Line
Remember that simple habits performed throughout the year can significantly reduce your tax exposure. The more you understand your personal finances and own tax situation, the better prepared you will be to take advantage of these methods.
Do you want to set your employees up for financial success? Reach out and say hello! Oak House Benefits provides tailored financial education sessions and group retirement support for your teams year-round.
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Chris Santos
Group Retirement Consultant
* Please note that charitable donations are a non-refundable tax credit; this means you must claim your other credits first. If the impact of your other credits is sufficient to bring your tax payable to zero, you will not be able to use your charitable donations to generate or increase a tax refund. If you still have tax payable, you will be able to use all or a portion of the donation amount. You can carry forward unused donations for up to 5 years but remember that donations can be claimed only once. For additional information on charitable donations in Canada and the tax implications, visit TurboTax for an informative article.