5 Secrets to Saving Taxes for Canadians

As an Tax Consultant in Hamilton, I am focused on saving taxes for Canadians – individuals and business owners.
Here is just a sample of Secrets to Savings Taxes for Canadians, which the Canada Revenue Agency (CRA) doesn’t want you to know.

• 1. Contribute to spousal RRSP's to equalize retirement income
  The major benefit of contributing to your spouse's RRSP, in addition to your own, is to end up with the same amount invested in RRSP's as your spouse upon retirement. This will result in tax savings upon retirement. A spousal RRSP is a special type of RRSP where the contributing spouse receives a tax deduction for amounts contribute to his spouse's RRSP. The money contributed to a spousal RRSP does not belong to the contributing spouse, but is legally owned by the recipient spouse. In addition, the maximum amount that can be contributed to a spousal RRSP is based on the contributing spouse's RRSP Limit.
• 2. Dispute your assessment

  After you file your personal income tax return, you will receive a Notice of Assessment from the CRA that will show whether the CRA has assessed your return as you filed it, or if they disagree and have made changes.

  For example, you may claim a tax deduction or a tax credit on your personal tax return, which the CRA disallows upon processing your return. This would be reflected on your Notice of Assessment.

  If you receive an unfavourable Notice of Assessment, don't just accept it! Instead, ask your Accountant to file a Notice of Objection with the CRA to dispute the assessment. The Notice of Objection must be sent within 90 days from the date of the original Notice of Assessment.

  You'll be surprised how a savvy Accountant can successfully challenge the CRA!

• 3. 100% Tax Deductible Investments

  The CRA offers special tax benefits for purchasing flow through shares, which you should take advantage of to save tax. Flow-through shares are shares in mining, oil and gas, and renewable energy companies whose main business is exploration and development.

  These companies transfer, or "flow-through", their resource expenses to the owners of flow-through shares, instead of deducting these expenses themselves. An owner of flow-through shares can deduct the transferred resource expenses on his/her personal tax return. Usually, the resource expenses transferred are the same the amount as the cost of your investment in the flow-through shares.

  For example, assume that you reside in Ontario, Canada and have purchased $10,000 of flow through shares in a mining company. Further assume that the mining company transfers resource expenses to you in the amount of $3,000 in the first year, $4,000 in the second year and $3,000 in the third year. As a result, your taxes payable will be reduced by $4,640 (i.e. $10,000 x 46.4% tax rate) over a 3 year period. In addition, you will be entitled to Federal and Ontario tax credits for $1,500 and $500 respectively. The total tax benefits alone amount to $6,640!

  Even if the flow through shares don't increase in value, you'll end up with $16,640 (i.e. $10,000 + $6,640), which represents a 66% return on investment.

  Note that the prices of flow-through shares can be very volatile, so it's important that you consult with a financial advisor before purchasing such shares.

• 4. Contribute to your RRSP's before paying off your mortgage
  "In most cases, you'll be better off by using your extra cash to invest in a RRSP, rather than paying down your mortgage faster",
  Let's take the example of Sue. Sue has a $100,000 mortgage, with monthly payments $800, and 14.58 years left on her mortgage. The interest rate on Sue's mortgage is 5% and the long-term rate of return on her RRSP's is 5%. If Sue has $500 of extra cash per month, should she pay off her mortgage or contribute the extra cash to her RRSP?
  Pay off Mortgage If Sue uses the extra $500 per month to pay down her mortgage, her mortgage will be reduced by $55,672 and her amortization period will be reduced from 14.58 years to only 7.67 years.
  Contribute to RRSP If Sue contributes the extra $500 to her RRSP each month, her RRSP will grow to $55,672 in 7.67 years. In addition, she will have saved taxes of $18,400 over 7.67 years, based on a 40% tax rate. Therefore, contributing to RRSP's makes more sense for Sue, because of the tax savings.
  Contribute to RRSP and Pay Down Mortgage If Sue contributed $500 monthly to her RRSP and used the tax savings to pay down her mortgage faster, then Sue would end up with the following result:
  - $55,672 in her RRSP in 7.67 years - She would pay down her mortgage by a total of $33,517; and - Sue's amortization period on her mortgage would be reduced to only 10.67 years. Therefore, the best outcome for Sue would result if she contributed to her RRSP and used the tax savings pay-down her mortgage.
• 5. Turn mortgage interest into tax deductions
  Mortgage interest that you pay to your bank for your home can be deducted, contrary to what most people think. If you borrow money against the equity in your home and use that money to purchase income producing investments (e.g. real estate, stocks, bonds, etc.), then the interest paid on the money borrowed can be deducted on your personal tax return.
  Become an independent contractor and not an employee.
  Independent contractors have far more tax benefits and tax write-off's than employees, because as an independent contractor you are considered to be self-employed. As a self employed person, you can deduct expenses such as:
  - Your home office expenses - Car expenses - Meals and entertainment - Computer and equipment - Telephone and internet - Other business related expenses Additionally, self employed persons don't have payroll taxes deducted from their cheques, which is another big tax advantage over an employee.
  Changing your status from employee to independent contractor involves more that modifying your contract with your employer. To be identified as an independent contractor by the Canada Revenue Agency for tax purposes, you must:
  - Be able to exercise control over the work that your perform - Have ownership of the tools required to do your work (e.g. laptop, telephone, etc.) - Take on financial risk - Have an opportunity for profit
  As this is a complex area of tax, you should certainly consult with an expert in income tax preparation.

Small Business Deduction Canada

• What is the Small Business Deduction in Canada?

  The small business deduction is a tax credit available to corporations in Canada on active business income that reduces the general corporate tax rate for corporations from 32% to only 16.5%.

  The first $500,000 in profit (that is, revenue minus expenses) is allowable for the small business deduction.

• Types of Corporations That Qualify Small Business Deduction Canada

  Which types of businesses qualify for the small business deduction in Canada?

  In order for a business to qualify for the small business deduction it must be a Canadian Controlled Private Corporation (CCPC). A CCPC has the following characteristics:

  • - Incorporated in Canada
  • - More than 50% of the voting share capital of the corporation must be owned by Canadian residents
  • - Is not listed on a stock exchange.
• Types of Income that Qualify Small Business Deduction Canada

  What types of income qualify for the small business deduction in Canada?

  The income earned your by your CCPC must be Active Business Income in order to receive the small business deduction in Canada.

  Active Business Income simply means income earned from a business. It excludes investment income and capital gains.

• How do I Take Advantage of the Small Business Deduction in Canada?

  Now that you know what types of corporations and income that qualify for the small business deduction in Canada, how do you take advantage of it?

  To take advantage of the small business deduction, your accountant must prepare a Corporate Income Tax Return and claim the small business deduction on the return. For corporations that earn both investment and active business income, a separate calculation must be performed on Federal Schedule 7 of the Corporate Income Tax Return to calculate the small business deduction.

  If your corporation has profits in excess of $500,000, then the excess profit will be taxed at a rate of 32%. Therefore, it's better for your corporation to declare a bonus payable to you to reduce the profit of your corporation to $500,000. For the bonus to be tax deductible, it must be paid within 180 days of your corporation's year end.

Benefits of Incorporating in Canada

• Low Tax RateBenefit of Incorporation Canada

  The first major benefit of incorporating is that corporations have a very low tax rate of only 16.5%. Contrast that to an individual in the highest marginal tax bracket who pays 46.4% in taxes. "That means by incorporating, you could save up to 30% in taxes," says Nick Klair, Tax Consultant Hamilton.

• Limited Liability Protection Benefits of Incorporating

  The second major benefit of incorporating in Canada is that corporations offer limited liability protection. What that means is that in the event of a lawsuit against your corporation, your personal assets such as your house, your vehicle, and personal belongings are not at risk.

  On the other hand, if you are a sole-proprietor or are a general partner in a partnership, and you are sued, then your personal assets will be at risk.

  "If you are concerned about protecting your personal assets, you should incorporate," says Nick Klair.

Accurate Books and Records

Accounting Tips for Small Businesses in Canada

• Account Tip #1 for Small Businesses in Canada Keep accurate books and records

  As a small business owner it's very important that you keep accurate books and records in order to:

  • - Assess the profitability of your business.
  • - Evaluate the financial health of your business.
  • - Cut costs by identifying excess spending.
  • - Have peace of mind when audited by the Canada Revenue Agency.
  • - Apply for a long by presenting accurate financial statements to your bank.
• Accounting Tip #2 for Small Businesses in Canada Review financial Reports Regularly

  A proper accounting system should provide you with accurate, monthly financial reports such as:

  • - Income statements.
  • - Balance sheets.
  • - Goss margins by product.
  • - Inventory listing.
  • - Cash flow statements.
  • - Budgets.
  • - Financial statements by company division / department.

  With monthly cash flow statements you can identify the sources and uses of cash, which enables you to better manage company resources.
  With monthly budgets for your small business in Canada, you can better plan for the coming months, and effectively manage cash inflows and cash outflows.
  With departmental financial statements you can assess the profitability and financial health of each department.
  If your current accounting system cannot produce appropriate financial reports, then you should seek the advice from us for free.

• Accounting Tip #3 for Small Business in Canada Buy the right accounting software

  Your small business in Canada requires an effective accounting software package to produce reliable financial reports.
  "I recommend accounting programs such as QuickBooks Pro or Simply Accounting, both of which are great for small businesses," says Nick Klair.
  In addition to the right accounting program, your small business in Canada requires an excellent bookkeeper. If you have a good accounting software package, but you lack a capable bookkeeper, then the information produced by the accounting system will not be reliable or useful.

• Accounting Tip #4 for Small Business in Canada Implement strong financial controls

  Effective financial controls are a must for a small business in Canada. A lack of financial controls can lead to unreliable business intelligence, poor financial information and fraud.

  Examples of financial controls are:

  • - Keep receipts for expenses. Without receipts you have no proof of purchases made.
  • - Maintain a separate credit card for business purchases only. The last thing that you want is a grocery bills or movie tickets appearing on your credit card. Imagine if a tax auditor saw that.
  • - Have a separate business account for your deposits and your business expenses. There should not be any personal expenses whatsoever in your business account.
  • - Keep a daily sales log and a deposit book so that you can track sales deposits. This will reduce the chance of employee theft.
  • - Dual signatures should be required on company cheques. If only one person has signing authority, then that person has the ability to commit fraud by writing cheques for invalid expenses.
  • - Review and approval all employee expense reports before they are paid, which will keep spending under control.
  • - Regularly backup your electronic financial data so you don't permanently lose it.

  Consult with your us on how to improve your small business financial controls.