We've entered the New Year and the time for festivities has almost come to an end. Many online tax websites have started shooting emails to propose their services as the time to filing individual tax returns is also nearing. This article gives a few tips that you may use to cut your tax bill.
Escaping your tax liability will backfire
Each year, there are many Canadian residents that consider leaving the country to escape their tax duties. Nevertheless, such a calculation can only go wrong as there's no inexpensive way to avoid paying taxes in Canada. As you might know, Canadian taxes are determined based on the residency criteria using common-law principles. This means that if you have resided in the country for most of the year, then you'll be assessed a tax rate like everybody else.
For those who are thinking about giving up their citizenship, there will be capital gain taxes to pay and calculated based on the fair market value of all the assets owned. The only way to avoid that tax liability is by relocating to a tax haven such as Switzerland or Luxembourg.
If you transfer your assets to one of those countries, you'll never have the bad surprise of being taxed one day because these nations don't have any tax treaty with Canada.
Taking advantage of the TFSA's benefits
The Tax Free Savings Accounts (TFSA) contribution was introduced in 2009 and its limit set at $5,000 per year. If you've never contributed before, now is the best time to do so especially since it's indexed to inflation. Since last year, taxpayers are authorized to increase their contribution to $500 over the limit, which thus sets it at $5,500 from $5,000. Other benefits of the TFSA include:
- No taxes on the income generated from the contributed funds
- Several types of investments can be used to contribute to the fund such as cash, bonds, mutual funds etc.
Accessing to the lower marginal tax rate of your lower-income spouse/partner
The government of Canada allows you to transfer/lend some of your funds to your spouse/partner to reduce the tax burden in the income that your non-RRSP investment generates. However, this transaction needs to be done under specific terms. For example, the transfer or lending must be interest rate-bearing and the interest payment must be made by Jan 30th of each year. Given the complexity of this tax-saving transaction, you're strongly recommended to consult with a professional accountant who will help you identify the best strategy to cut your tax liability.
Claiming tax deductions after breaking up
While breakups are often portrayed as bad events in people's lives, they also come with one main advantage: tax deductions. If you used to be the breadwinner in your couple and were required to provide your ex-wife or husband with spousal support, then you're entitled to deduct it from your income taxes. It's important to note that only spousal support is tax-deductible. Indeed, claims of tax deductions on child support have been declined since 1997.
There are a few other ways to cut your tax bill in the Canadian tax system. To maximize the tax savings that you can generate, you should contact a local chartered professional accountant who can provide a high level of accounting services. Although this article has laid out a few tips that might seem easily applicable, you shouldn't try to implement them on your own since tax legislation is very intricate and requires specialized knowledge. After all, you don't want the Canadian Revenue Agency to send you back your tax returns and issue you a fine in the process.