Whether you are self-employed or an employee, no one wants to pay more taxes than they need to.
Are you self-employed? By maximizing all the business deductions available to you, you can minimize your taxes. Some considerations if your business is incorporated:
- Ask yourself how much money you need personally to live on. You can enjoy a potentially significant deferral opportunity by reinvesting as much of the profits as possible back into the business, as the corporate tax rate (11% to 31% depending on your corporation’s province of residence) is significantly lower than the top personal marginal tax rate (up to 55% depending on your province of residence) that you would be subject to if the income was taxed personally.
- You can pay yourself a sufficient salary from the business in order to take advantage of RRSP contributions and/or the CPP regime.
- If your spouse or children are active in the business, consider paying them a reasonable salary. By doing so, you are tax efficiently income splitting with them. Earnings in their hands will be taxed at lower marginal tax rates (assuming little to no other sources of income).
- If your children are 18 years of age or older, consider having them own a dividend-paying class of shares. They can then receive dividends from the current after-tax earnings of the corporation which may be used to fund expenses that you are currently funding with your pre high-tax dollars. A family trust, which can provide additional non-tax benefits, can be used to own shares on behalf of your children and other family members.
Are you an employee? Here are a few ways for you to impact your tax bill:
- Maximize your RRSP contributions. Overall tax savings are most significant for individuals who are currently in a high tax bracket but will be in a lower bracket when the RRSP money is withdrawn.
- Invest using your tax free savings account where you can earn investment income tax free. The contribution limit for 2015 has been raised to $10,000.
- Take advantage of all the tax credits available to you with respect to your children’s arts and fitness activities. The children’s fitness tax credit for 2014 and subsequent years was increased to $1,000 per child, and is a refundable credit for 2015 and onwards.
- Claim medical expenses for yourself, your spouse and dependent children. The most commonly missed expenses are dental bills, eyeglasses, private medical insurance (including certain travel medical insurance premiums) and certain travel costs such as travel to regional or provincial centres for treatment. Medical expenses should usually be combined and claimed on the income tax return of one spouse in order to maximize the tax credit.
- Using your own vehicle for employment duties? Deduct the business portion of your automobile expenses in their entirety or the non-reimbursed portion. To claim employment expenses, have your employer provide you with a completed form T2200 Declaration of Conditions of Employment.
- Keep track of your donations. You are entitled to tax credits when you donate and enhanced credits if you are a first-time donor.
- File on time. Taxpayers who do not file their tax returns on time face significant late-filing penalties: 5% of the balance due plus 1% per month to a maximum of 12 months for the first offence, plus applicable interest on the penalty.
Crowe MacKay’s audit, tax and advisory professionals can assist you to ensure you are minimizing your taxes, whatever your current situation is. Call us to see how we can help.
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