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Legitimate ways to pay less in taxes

Taxes are unavoidable. Since 1917 we’ve been paying them and plottingour way around them. Finding legitimate ways to reduce the amount oftaxes you pay will help you protect your net worth. Just to be superclear, I’m not talking about tax evasion—that’s illegal.

Taxes are unavoidable. Since 1917 we’ve been paying them and plotting our way around them. Finding legitimate ways to reduce the amount of taxes you pay will help you protect your net worth. Just to be super clear, I’m not talking about tax evasion—that’s illegal.

The two most common ways to minimize taxes are to invest in tax-advantaged savings plans such as RRSPs and TFSAs.

Nearly anyone can have an RRSP. It is, by far, the most utilized tax-reduction tool for Canadians. Individuals can contribute up to 18 per cent of their earned income through RRSP contributions, up to $22,000 per year (indexed), and the limit can sometimes vary depending on your pension program at work . These contributions are fully tax deductible and they grow tax-deferred until withdrawal. The greater the amount you contribute, the more income you get to deduct. If you can’t maximize your RRSP limit, you can carry-forward the contribution room indefinitely.

The Tax Free Savings Account (TFSA) allows you to grow your money tax-free. So, when you withdraw the funds, which you can do without penalty at any time, you don’t pay tax on capital gains, dividends, trust distributions, or interest earned. On the flip side of this, capital losses within the plan are not tax deductible and dividends aren’t eligible for the dividend tax credit. You can contribute up to $5,000 annually (indexed). Unused TFSA contribution room can be carried forward.

When you invest in non-registered investment plans you can reduce taxes through the dividend tax credit and favourable capital gains tax rate. Dividends are paid to investors who hold certain stocks. The dividend tax credit reduces the taxes that would be paid on this income. Capital gains (appreciation) are taxed at a more favourable rate when compared to the personal income tax rate. Capital gains (and losses) are incurred when an investment is sold.

Charitable giving is yet another effective tool to reduce taxes and support your community. When you give money to a registered charity, it issues you a tax receipt that goes toward a tax credit when you file your return and then you ultimately decrease the taxes you pay. If you don’t use the full tax credit, you can carry it forward.

There are many tax credits available for Canadians including those for home purchase, renovations, child care, transit, extended medical/health expenses, and so on. Check the CRA website www.cra-arc.gc.ca (select information for individuals) to see which personal tax credits apply to you, rates and a list of registered charities or other reputable tax websites like www.hrblock.ca.

Having a professional prepare or review your taxes pays off because he or she they can help you optimize, and file for, the tax credits that apply to you. Your tax return is due by April 30 of each year.

 
 
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