Ribeyre Coquitlam Reveals Eight Legal Tax Reduction Strategies To Use

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With the end of the year rapidly approaching, it is time to discuss how to limit the amount of taxes you owe to your accountant. Accounting for each of the following eight tax reduction methods can mitigate the tax burdens of both your family and business.

1. Contribute To Your RRSPs

RRSPs are among the most efficient tax reducers available because they reduce your taxable income at a 1:1 ratio. Put another way; your taxable income decreases by one dollar for every dollar invested in your RRSPs.

There is a cap of 18 percent of your annual net income (up to $138,500) or $24,930 in annual contribution room that may be put into RRSPs in any given year.

The annual contribution room carries over indefinitely, so it is important for teenagers and young adults to begin filing tax returns as soon as they start earning taxable income to accumulate room for later use.

If you have a spouse, you can also make contributions to spousal RRSPs to cut how much you pay in taxes. The higher income spouse gets the tax deduction now, while the lower income spouse eventually claims that money as income for retirement purposes.

2. Vehicle Deductions

If you use your automobile for business purposes, you may deduct a percentage of your auto expenses on your tax return. Self-employed individuals have no extra forms to fill out to claim their vehicle, but a signed T2200 form is required from the employer if an employee wants to do so.

Potentially deductible expenses include gasoline. Regular maintenance, auto insurance, loan interest payments, car washes, leasing costs, and capital costs.

Commuting does not qualify for a tax deduction, so don’t bother trying. You can deduct your vehicle if you regularly use it to meet with clients outside of your primary place of business, opening it up to more taxpayers than you might think. Keep a log of your business travels to support your claim if it ever gets questioned.

No more than a $30,000 purchase price may be claimed on your vehicle, so the difference between your vehicle’s purchase price or lease payment and that figure can never be deducted.

3. Claim A Home Office

This isn’t as good a deduction as many people think it is, but can still be of some use. To qualify for a home office deduction, you must meet the following criteria:

  • Your home is your principal workplace.
  • Your office is used exclusively for earning income.
  • You regularly meet with clients or customers there.
  • You do not have a separate office space.

Employees may deduct utilities, home maintenance, and rent. Commissioned employees may add property taxes and insurance to that list. Self-employed people may deduct all of the above plus mortgage interest payments.

All deductions are proportional to the number of your living quarters your home office takes up. For example, you may only claim 10 percent of your rent if your home office is 10 percent of your home. Employees again need a signed T2200 from their employer to claim any of these deductions.

4. Medical Deductions

Out-of-pocket medical expenses must equate to the lower of 3 percent of your net income or $2,152 to be tax-deductible, and only expenses above this threshold may be claimed. Healthcare premiums, prescriptions, dental coverage, and visual care may all be deducted if you qualify.

Self-employed or incorporated business owners may choose a cost-plus health plan such as Olympia Benefits and claim the entire healthcare cost without meeting any minimums as described above.

5. Charity Deductions

Charitable donations are eligible for your tax return up to five years after the donation is made, and it can be advantageous to hang on to your receipts. Donations more than $200 grant you the maximum tax credit of 46.4 percent in British Columbia even if you do not otherwise fit in the top tax bracket.

Any stocks outside of your RRSPs may also be donated instead of cash to not only claim the tax credit but also avoid any capital gains taxes you would have otherwise paid due to an increase in value.

6. Interest Deductions

If you borrow money to earn income through investment or rental property, your interest payments are tax deductible. It is important to keep all relevant documentation, as the CRA often asks to verify these deductions.

Your mortgage is less tax-friendly than your investment property, so pay it down first. As a general rule of thumb, use cash for personal purchases and borrow money for investments and other business purchases.

7. Childcare Deductions

Your childcare must allow either you or your spouse to earn employment income to qualify. Daycare, day camps, and nannies can all be deductible if you meet this criteria. Only the lower income spouse may claim a childcare deduction, but it is a direct income deduction instead of a tax credit.

8. Incorporate Your Business

Incorporating your business protects your personal assets from any corporate liabilities, such as a lawsuit. British Columbia’s corporate tax rate is only 11 percent vs. a maximum personal tax rate of 46 percent, so there are obvious savings to be had here. If your business makes enough money that you don’t need to take everything out to pay your bills, incorporation is the way to go.

Be sure to discuss these and other tax deductions with your accountant to determine exactly what you are eligible for.

These tax reduction tips are created by the CPAs at Ribeyre Coquitlam. They can be found here:

Ribeyre Chang Haylock
2071 Kingsway Ave, Port Coquitlam, BC V3C 6N2
604-945-3639
ribeyre.ca