Most tax planning is fairly straightforward. You’re already taking advantage of the best tax shelters if you own your home and contribute to an RRSP, TFSA, and RESP. But the big question on everyone’s mind is: how to get more money back on taxes in Canada?
To get the most out of your tax return, it’s important to understand that there are two main ways to reduce your taxes owing: (1) tax deductions and (2) tax credits. Unfortunately, many Canadians aren’t aware of all the tax deductions in Canada, or what can you claim on your taxes, leading them to lose out. This article explains everything you need to know about tax deductions and tax credits in Canada, as well as how to take advantage of the tax benefits in Canada.
Step 1: Maximize Your Tax Deductions
A tax deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. We have a progressive tax system in Canada with different tax brackets for different levels of income. Your marginal rate is the rate of tax incurred on each additional dollar of income.
The chart below shows the federal tax rates for 2020 and will help illustrate the point below:
|Taxable Income||Federal Tax Rate|
|$0 to $48,535||15%|
|$48,536 to $97,069||20.5%|
|$97,070 to $150,473||26%|
|$150,474 to $214,368||29%|
|$214,369 and up||33%|
Let’s say you have a taxable income of more than $214,369. That means your marginal federal rate is 33% and a $1,000 tax deduction would save you $330 in federal tax.
On the other hand, if you earn less than $48,535, then you are taxed at the federal rate of just 15% and a tax deduction of $1,000 would only save you $150 in federal tax.
Here are the best ways to reduce your taxable income with tax deductions:
1. RRSP as Immediate Tax Relief
Any Canadian who has earned income should file a tax return and start building RRSP contribution room. You can contribute 18% of your earned income from the previous year (up to yearly maximum limits), and the contribution room carries forward indefinitely. Canadians put money into RRSPs to primarily save for retirement, but the contribution also provides immediate tax relief – reducing taxable income by the amount of your contribution.
You’re allowed to contribute to your RRSP in the first 60 days of the calendar year and apply the deduction to your prior year’s tax return. That gives smart tax planners a window to maximize their tax deductions by making an RRSP contribution during this period. A good rule is to contribute to your RRSP when your income is high – say more than $50,000 per year – otherwise, it might make sense to prioritize the Tax-Free Savings Account (TFSA).
For instance, I use TurboTax during the first 60 days of the year to enter all of my prior year’s tax information and determine how much I owe (if anything). If a big tax bill is on the horizon, I’ll use an RRSP calculator to determine how much I’ll need to contribute to an RRSP to reduce my taxes owing to zero.
Opening an account and making a contribution is just the first step to building a retirement nest egg in your RRSP. You’ll want to invest that money in an appropriate mix of stocks and bonds to build wealth for the future. A great option is to open an RRSP investing account with a robo-advisor to save on management fees and let the robo advisor do the work of monitoring and rebalancing your portfolio – at a much lower fee than what traditional financial advisors and mutual funds charge. Our top choice is Wealthsimple, but if you want to compare robo advisors in Canada head-to-head, read our Complete Guide to the Best Robo Advisors in Canada.
Pro tip: Do you know approximately how much you’ll contribute to your RRSP this year? Skip the refund at tax time and keep more of your money in your pocket by filling out a T1213 – Request to Reduce Tax Deductions at Source. This will reduce the tax deductions on your paycheque.
2. Deduct Child Care Expenses
Childcare has quickly become one of the largest household expenses for young families. Thankfully, the CRA allows you to claim these expenses as a tax deduction on your tax return.
In most cases, childcare expenses must be claimed by the parent with the lower net income.
Basic limit for childcare expenses
- Eligible children born in 2012 or later = $8,000
- Number of eligible children born in 2002 to 2011 = $5,000
Pro tip: In addition to the usual fees from daycares or in-home providers, most overnight camps and summer day camps are also eligible for the childcare deduction.
3. Deduct Moving Expenses
You can deduct reasonable moving expenses if you’ve relocated for a new job or to attend a post-secondary program at a university, a college, or another educational institution. The home will need to be at least 40 kilometres closer to your new place of employment or school. Moving expenses may include:
- Vehicle expenses, accommodations, and meals for your family
- Any fees incurred for changing your address on documents
- The cost of utility hookups and disconnections
- Title transfer costs for your new home
An Ottawa man recently tested CRA’s limits by moving his belongings in a canoe – and he won.
Other Eligible Tax Deductions:
- Union or professional dues
- Support payments
- Employment expenses (w/ T2200)
- Carrying charges or interest expense to earn business or investment income
Pro tip: You can also deduct the costs of maintaining a vacant former residence.
Step 2: Maximize Your Tax Credits
Tax credits are different than tax deductions and come in two flavours: refundable and non-refundable.
- A non-refundable tax credit is applied directly against your tax payable. That means if you have tax owing of $500 and get a tax credit of $100, you now only owe $400. If you don’t owe any tax, non-refundable credits are of no benefit.
- A refundable tax credit, such as the GST/HST credit, means you will receive the credit even if you have no tax owing.
Here are the best ways to take advantage of tax credits:
- Basic Personal Amount: Every Canadian resident is entitled to claim the basic personal amount on his or her tax return. For 2019, the basic personal amount is $12,069. What this means is that instead of paying taxes on your entire income, you’ll just be taxed on the remaining income once the basic personal amount has been applied. In other words, think of it as your first $12,069 worth of income being considered tax-free or tax-exempt.
- Spousal Amount: If you support your spouse or common-law partner, and their net income is less than $12,069, you can claim all or a portion of the spousal amount ($12,069). The amount is reduced by any net income earned by the spouse. The spousal amount can only be claimed by one person for the spouse or common-law partner.
- Age Amount: The Age Amount tax credit is available to individuals aged 65 or older (at the end of the taxation year). The federal age amount for 2019 is $7,494. This amount is reduced by 15% of income exceeding a threshold amount of $37,790 and is eliminated when income exceeds $87,750. The tax credit is calculated using the lowest tax rate (15% federally), so the maximum federal tax credit is $1,124 for 2019. The age amount can be transferred to the spouse if the individual claiming this credit cannot utilize the entire amount before reducing taxes to zero.
Other Eligible Tax Credits:
- Volunteer firefighter or Search & Rescue details
- Adoption expenses
- Interest paid on student loans
- Tuition and education amounts
- (T2202, TL11A), and exam fees
- Medical expenses (including details of insurance reimbursements)
- Donations or political contributions
Step 3: Amend Prior Tax Returns
Did you know you can amend tax returns up to 10 years back to trigger a refund from a prior year? Perhaps you’ve missed tax credits or deductions from prior years – it’s easy to do, and I’m sure most of us have made simple mistakes on our tax return.
The good news is that you can easily adjust your tax return by completing a form called T1-ADJ (T1 Adjustment Request). Note that you may be able to make changes online with the “Change my return” service available in CRA’s My Account. Make sure you’re amending a prior return and not filing a second tax return for that year.
Here are a few other commonly missed tax deductions and credits that can put more money back into your wallet:
- Brokerage fees. Fees paid for stocks that were bought or sold in your non-registered account in the past 10 years can be deducted on your tax return. Better yet, open an account with Questrade and don’t pay any fees for ETF purchases.
- Capital losses. If you sold shares in a stock or ETF for less than the price you paid, you should record the capital loss for that year even if there are no capital gains in the same year to offset it. That’s because a capital loss can be carried forward to future years and eventually be used to offset any capital gains in the future.
- Caregiver amount. This is credit is available for individuals who had their mother or father move in with them and needed to care for them. Note that there is a maximum income requirement for the mother or father in order for you to be eligible to claim this credit.
- Disability amount – If you have a child born with a severe disability you can get a credit for the disability amount. You must get your doctor to fill out a certificate confirming the diagnosis.
- Tuition credits. If you have a child attending post-secondary you can transfer up to $5,000 per year of his or her tuition credits to yourself. This is useful because the student likely won’t have an income high enough to use all of the credits.
- Charitable donations. Any charitable donations should be combined between spouses in order to maximize this credit (the percentage of credit is higher for any donation over $200). For donations made after March 20, 2013 until the end of 2017, eligible first-time donors may get an additional federal tax credit of 25% on the first $1,000 they donate (the first-time donor’s super credit). 2017 was the final year that you may be eligible to claim this credit.
Step 4: Use Online Tax Software
These days, you can DIY your own tax return and save a bundle on tax filing fees. Online tax software, like TurboTax (our top choice), make it easy: you can instantly import tax information from the Canada Revenue Agency with Auto-Fill My Return. The software includes a complete list of tax deductions to make it easy for customers to find the deductions that apply to them.
Once your information is entered, a review section offers suggestions on credits and deductions that may apply to your situation, as well as ones that definitely apply. The software then guides you back through your tax return and helps apply the recommendation(s).
The bottom line? TurboTax offers a cheap and easy way to file your taxes and get the most out of your tax return. Whether you’ve got a straightforward tax return or a complicated one involving business income and expenses, TurboTax has a software suited to your needs at an affordable price. In particular, TurboTax Self-Employed is the only software in Canada that is designed specifically for people with self-employed income and provides expert guidance specific to these individuals. If you’ve got questions, TurboTax Free customers can upgrade to a paid option that includes full guidance, interview-based profiling, and other features.
For most of us, the best way for us to get more out of our tax return is to contribute to an RRSP. You have until March 2nd, 2020 to make RRSP contributions that can be used for the 2019 tax year. However, there are reasons why not everyone should contribute to an RRSP and should look at a TFSA instead.
Other than that, look into eligible tax deductions, such as childcare and moving expenses, and tax credits, such as the basic amount, spousal amount, and age amount, to find legitimate ways to reduce your taxes owing. Don’t forget to comb through your records for eligible expenses that you may have missed claiming on previous years’ tax returns. You can go back up to 10 years and file an amendment with CRA.
Lastly file your taxes using reputable online tax preparation software, like TurboTax. With TurboTax, it’s not only incredibly affordable but the software also automatically catches any deductions and loopholes to maximize your tax refund. And that’s something worth spending money on!