In Canada,
or pretty much anywhere in the world,
there are two things that are certain in life:
Death and Taxes.
And since we cannot cheat death,
what are the plans to lower down your taxes?
2 years ago,
I made a similar video about
tax saving tips in Canada.
It was in my early production,
and so audio was bad,
background music was too distracting etc.
So, I want to redo this
and give you the best experience!
Oh, and if this is your first time here!
Hey, my name is Thomas!
And this channel is about how you can save for
retirement, reduce taxes,
and learning all the financial hacks!
So the best way you can support this channel
is to click the subscribe button down below
or you can click the super thanks button,
so I can buy a cup of coffee and
produce more videos like this one!
So Let’s get started!
First of all, I want to share one of my
favourite books in my financial journey:
It’s called
15 secrets the taxman doesn’t want you to know
by Dwayne Daku.
It focuses on using non-accounting terms to
provide you with suggestions on
how to reduce the tax efficiently
and it’s totally legal!
The book was first published back in 2008
but lots of ideas and concepts
can still apply to today’s world.
Taxes have been the single biggest expense
to Canadian since the 60s
According to the Fraser Institute,
a Canadian research company based in Vancouver,
the average family needs to pay
almost $60,000 ($58,567) in taxes in 2022.
That’s 45% of the
Canadian average household income.
And not to mention all the housing, clothing,
food cost has increased tremendously.
Take gasoline for example:
35% of the cost goes to tax.
First, there is the carbon tax,
which is a tax on top of the federal tax.
Then there is a tax that the provinces charge
and finally, there is GST of all the other taxes,
so it’s a tax on tax and more tax on taxes.
Even with the ever-increasing taxes,
Canada is still in a huge deficit.
Let’s take an example…
If Quebec taxed 100% at
all income generated in the province,
it would take more than 3 years to
pay off all the debts and fund
all the obligation they currently have.
And although with COVID,
the government was printing money non-stop,
dumping money into the economy
causing inflation isn’t anything new.
And guess who needs to pay the bill at the end?
So the author,
felt that people need tips and direction
to reduce their tax obligation effectively
Usually around March or April,
many people want to file the tax early
because they are expecting a good tax refund
and look forward to spending it.
Statistics Canada indicates that CRA issued
about 18 billion in tax refunds in 2020,
Well, What does that mean?
It means they pretty much collect
$1800 per person up front first.
So technically speaking,
CRA is borrowing a $1800 interest-free loan
from each person every year in Canada.
So let's take a look at what could happen
if you're simply paid what was due, no more
and had those extra funds to invest each year.
What would happen if you invest $1,800
each year in a tax shelter plan
for 30 years at a 5% interest rate?
Would you believe you would save
just under $126,000 in your pocket?
Keep in mind,
this comes from your original $54,000
that you can keep it yourself.
So the first tax saving secrets is to
review the withholding tax in your payroll.
If you are working for someone,
your employer will usually automatically
deduct a portion of your paycheque for taxes.
But if you have a consistent record
of RRSP contribution,
always getting way more tax refund.
you can ask your employer to
adjust the amount using the Form TD1.
If there are changes in your life such as
spouse or number of dependents, credits,
tuition, disability of caregiver amounts,
these amounts give your employer a view
into how much income tax
should be deducted at the source
and your employer can adjust
your tax withholding accordingly.
If your RRSP, medical, or charitable
contributions are consistent each year,
you could contact CRA and get a wavier that
permits you to reduce your withholding tax.
But please keep in mind,
do not simply spend all those additional funding.
You have managed to get along
without that extra cash,
so you should be able to
maintain the same lifestyle.
The purpose is to use that extra money
to speed up your savings.
And also,
you might still need to pay tax owing even if
your employer deducts the correct amount of tax.
Reasons for this can be other sources of
income such as investments, or taxable benefits.
Best to talk to an accountant
before taking any action.
Now secret number two:
Turning bad debts into good debts.
Dwayne has a unique way of looking at debt.
He defines bad debt as when you cannot use the
interest charge as a deduction on your tax return.
Let’s look at an example to see what he means.
Say John owes $5,000 on his credit card.
The interest on the credit card debt is
not tax deductible and it
compounds interest so therefore it’s bad debt.
He also has another $5,000
that he set aside for investment and
collecting interest and dividends.
What he can do,
depends on the market performance,
he can first cash out that $5,000 investment
to pay off the credit card
to save that 20% interest charge.
and in the meantime,
he can borrow from his home line of credit
say 5,000 and to invest
back into his original investment.
Why? Like I mentioned in my other video,
under line 22100, carrying charge,
when you borrow money to invest.
As long as the investment is
an income-producing investment,
which means it needs to
yield interest and dividends.
Then the interest you borrow is tax deductible.
But if the earnings in the investment
can produce capital gains only,
then you cannot claim the interest you paid.
This is extremely powerful if you are making
more than $150,000 and above and
almost max out your rrsp room.
Again, I have a whole list of videos that
talks about it! Be sure to check it out!
Some people further extend
this idea to their mortgage payments,
turning the mortgage interest payment
into a tax deduction.
When you are paying down the mortgage,
the equity in the property increases and
therefore you can borrow more in a
Home Equity Line of Credit, known as HELOC.
Then use that money to invest into
an income-producing investment,
which can be tax deductible.
The investment return and the extra tax return
is then used to pay down the mortgage again.
If the strategy is executed properly,
you can then repeat this
until the mortgage is paid off.
The strategy is called the Smith Manoeuvre,
named after Fraser Smith.
But be warned,
this strategy is not for everyone
and requires a careful juggling act.
There are a lot of risk factors behind it
both in tax and investment liabilities so please
talk to a financial advisor
before implementing this strategy.
Secret number 3 is reduce income tax efficiently.
Dwayne points out there are
lots of ways to reduce income tax.
Each of them can only reduce a little,
but together they can provide you
with a significant impact
Let’s name a few.
The first is to Deduct consultation fees:
If your tax return is prepared
by someone who charges a fee,
that amount can be a tax deduction.
Also, any fee paid for investment or
financial advice can be
deducted from the income earn
The next is deferred reporting.
If you have investments that mature
on a specific day like a term deposit,
try to schedule it to mature early in January.
That way you have almost
a whole year before having to
deal with the tax on the earning.
And the last way is a charity donation.
Canada has a generous tax credit system
for donors to charities.
For example:
Mary in Alberta makes a donation of $700.
The Federal will give her 15% for
the first $200 and 29% over $200.
Mary gets $175 in tax credit.
Also, the Provincial gives 10% on the first
200 and 21% after so she gets another $125.
So when Mary donates $700 in Alberta,
she gets $300 for her tax credit.
The net cost for her is $400
Alright we are onto secret #4
Registered Retirement Saving Plan
known as the RRSP
I’m sure you’ve heard of it before because
it is one of the common tools to deduct taxes.
An RRSP permits you to reduce your tax now
and allows the money to compound growth
and tax sheltered over the years.
Let’s look at an example again
to see how you can leverage it.
Tom makes $100,000 per year and
say his income tax bracket is at 30%,
so he needs to pay $30,000 as
income tax per year.
If he contributes $10,000 to RRSP,
his taxable income drops to $90,000.
For simple math purposes,
let’s keep it at 30% so the tax
he needs to pay is now $27,000.
He automatically saves $3,000 in taxes,
so technically speaking,
the $10,000 he puts away really
only cost Tom $7,000.
If Tom does this for every year,
and reinvest the tax refund.
after 30 years with a 5% growth,
Tom will have $900,000 in his RRSP account.
Indeed, compared to a TFSA,
RRSP is only a tax deferral plan
which you have to be taxed 100% when
you begin to withdraw the money.
But I think this can be offset with careful
planning and other tax saving strategies.
Also, the max you can contribute into a TFSA
is still $6,000 per year whereas
with RRSPs you can put up to 18% of
your previous income or $26,000 per year.
Now there are two things that
the author points out and that is
to make sure you name your spouse as a
beneficiary for your RRSP plan because
RRSPs can roll over tax-free
to your partner should you pass away.
If not, the whole amount in the RRSP
becomes your last year income and
easily 50% of your entire plan
goes to the CRA pocket.
The other one is to utilize something
called the spousal RRSP which is designed
for high-income tax bracket families.
This is where one person with
high-income tax bracket contributes to
their spouse who has a lower income.
The main advantage is at the time you withdraw,
the taxable amount of each could be
considerably lower than if
only one person was taking the full amount.
This is one of the ways to split income
in retirement and save on the amount
of tax that will have to be paid.
So yeah,
that’s some of secrets that I found it useful.
And these are just the
4 out of the 15 secrets the author suggested
Let me know if you find this video useful
so I can keep sharing those secrets!
And all you need to do is to
click the little red button below!
Or hit the super thanks button!
Hey thanks so much for watching!
This is Thomas and
I will see you in the next video!