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9 Ways I Reduced My Taxes Last Year





With 2008 done and over with, it’s that time of year to start thinking about the dreaded T word… taxes.  On one hand, I enjoy strategizing about legitimate methods to reduce income tax.  On the other hand, I don’t enjoy paying them.

Below are 9 ways I reduced my income tax in 2008 which can also be used for tax planning in 2009.

  1. Maximized my RRSP – This is perhaps the easiest and most common method for the everyday Canadian to reduce income tax.  With higher income this year, I made it a point to maximize my RRSP this year.  How does this tax deduction work?  Check out this post on how to calculate the tax return on your RRSP contribution.  If you have a spouse that isn’t working, then a spousal RRSP might be something worth looking into.
  2. Opened an Investment Loan for my Non-Registered Equities – We’ve all heard the advice to never invest purely for the tax benefits.  This is no exception.  In this case,  I opened an investment loan to take advantage of my home equity and invested the proceeds in strong dividend paying companies.  I’m hoping that over the long term, the dividends will provide a steady stream of income beyond the interest payable.  In other words, I’m started a modified Smith Manoeuvre investment strategy.  What are the tax benefits?  The interest charged on the loan is tax deductible.  The larger the investment loan, the larger the tax deduction.  The higher the marginal tax rate, the more appealing this strategy becomes.
  3. Claimed my Home Office – With a home based business there is an opportunity to claim the home office as an expense.  What can be claimed?  A portion of home expenses as a percentage of the entire living space along with equipment purchased for the business.  For example, if the home office is 10% of the living space, then 10% of the mortgage interest, property tax, insurance, and utilities can be claimed as a tax deduction.
  4. Kept my Medical Receipts – Even though we have free health care in Canada, prescription medication costs can add up!  With the pregnancy and baby this year, we had higher than normal medical bills which can be claimed if they exceed a threshold (~$2000 or 3% of your income, whichever is less).  Eye glasses, dental visits, physiotherapists, chiropractors etc. also count.
  5. Donated to Charity – Philanthropy not only has the benefit of helping others who need it most, it can also provide tax benefits.  Money or stock donated to a registered charity is eligible for the donation tax credit.  I’m personally trying to increase my charitable donations on an annual basis.
  6. Tax Loss Selling – Any equity sold in a non-registered account for a loss is eligible to claim the capital loss.  I took advantage of this strategy this year to raise cash to pay down my mortgage in addition to reducing capital gains tax paid in the previous three bull years.  Note that capital losses can only be claimed against capital gains 3 years back or carried forward indefinitely.
  7. Invested in Business Growth – Buying “stuff” for a business simply for the tax reasons is a terrible idea.  However, investing in business growth and claiming the expense is another story.  This year, I expensed business advertising, a little business travel, and spent more on hosting to support online growth.
  8. Organized all my Business Receipts -  This goes hand in hand with investing in business growth, but keeping your receipts organized can help a great deal.  Technically, you cannot claim an expense unless you have the physical receipt.  In the past, I would misplace a lot of receipts.  Over the past couple years, I’ve used a filing cabinet to store tax receipts in an organized manner.
  9. Family Account Structuring – With my wife on maternity this year, she had a reduced marginal tax rate.  With that said, we let her high interest savings account accumulate in her name untouched, while using my savings to pay down the mortgage etc.  This does not save a large amount of money, but every bit counts!

How did you organize your affairs in a tax efficient manner this past year?





34 Comments, Comment or Ping

  1. Hi,

    Thanks for the great tips.

    Normally, I would plan my taxes 1 year in advance also, like what you have mentioned – collecting receipts and contributing to retirement account etc.

    But you will be surprise, that there are many people and business out there that don’t actually prepare their taxes until the last month of the year. :)

    Rendell
    The Brandless Blog

  2. 2. Rajesh

    An often-overlooked category wrt to Point 4 – Medical expenses
    Employee-contributions (premiums) to employer-sponsored health insurance plans (not provincial health insurance plans) – such as medical/dental insurance can also be claimed under medical expenses.

    CRA link: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html

  3. 3. Ramona

    FT – Did I miss that your wife is active in the business and drawing a salary from that?

  4. 4. Michael

    Medical receipts, I always forget about this one since. We also had a baby this past year so it will be interesting to see if we come close to the threshold. Does the 3% apply to her normal income or her mat leave income? Anybody know?

  5. A lot of people do forget about med expenses and also tuition. A lot of classes people take offer tax receipts at the end of the session but you sometimes have to ask for them rather than having it automatically mailed out to you…

  6. That’s a pretty good list. I agree that maximizing retirement contributions is very important both from a tax perspective as well as from a net worth perspective.
    In terms of your business, I suppose you include this site and your rental property. Do you have your business structured in a particular legal form such as an LLC, corporation, partnership or something like that?

  7. 7. Chuck

    Home offices can be a bit contentious with the CRA. I cannot write mine off for example because the office / room is not dedicated 100% to my business.

    Some of the things we did were:
    - invest our non-leveraged portfolio in the wife’s name (much lower income spouse)
    - maximize the RRSP room of the higher income spouse first. Though this is tempered by analysis of post retirement incomes, and trying to keep them balanced.
    - keep and use all the receipts for kids sports & daycare
    - we also did some tax loss selling to cover the gains we made
    - we try and plan known medical expenses like preseciption eyewear so we can get some tax benefit

  8. I don’t claim a home office – we do have an “office/guest bedroom” but I never use it.

    Chuck – if you want to make contributions to the higher income spouse and balance the portfolios then you should use a spousal account for this purpose.

  9. 9. Patrick

    We don’t look at the donation tax credit as a way to reduce taxes, but as a way to increase our donations. We earmark a certain amount for charity, and if we can get tax receipts for particular donations, then we can gross up those donations.

  10. 10. Millionaireby45

    One recommendation is to file a T1213 now for next year. This will allow your employer to reduce the amount of tax they deduct from your paycheck. This is done by including you anticipated RRSP contributions and most other deductions on the T1213. This will not reduce your taxes but it will allow you to get the money that is owed to you immediately instead of with the government for a year.

  11. 11. Millionaireby45

    I have a home office question. I currently work from home and have claimed home office expenses for the last two years. Recently, my wife has started working from home as well. Can she claim home office expenses as well?

  12. 12. cannon_fodder

    We did 1 through 6 and also 9. Plus, I’m able to claim my auto expenses (which aren’t much since I fly more than I drive for business). I fill out the request to have my taxes reduced at source.

    But, these are things we do every year. This year, we made one significant change with respect to charitable contributions. I finally convinced my wife that instead of buying extra groceries and donating it to the box at the cashier line, it is better to donate money to the foodbank. There are two reasons:

    1. We get a tax receipt if we donate money but we don’t if we buy jars of peanut butter or tuna and drop them in the box. This means that we can effectively provide more benefit to the charity at the same cost to us.
    2. I’ve heard from the foodbank at which we volunteer that they are often able to use the money not only to buy the things most in need (often they are low on baby formula) but they can take advantage agreements they have whereby they can purchase items at wholesale prices rather than what we pay.

    So now we have an automatic amount deducted from our account to help our local foodbank at a time when they are in most need.

    Finally, another way in which I personally reduced my taxes is I earned less. Not exactly ideal, but unfortunately a reality for many people last year and in 2009 for sure…

  13. 13. DK

    Just a quick note:

    Medical expenses can be claimed be either spouse, regardless of which spouse (or dependant) incurred the expense.

    Therefore, have the lower earning spouse claim all the medical expenses to get the maximum credit.

  14. 14. teddy

    Even though we have free health care in Canada, prescription medication costs can add up!

    Ahem . . . the economist in my feels the need to speculate that you likely meant to say “taxpayer funded” health care.

    My 36% marginal tax rate tells me that it isn’t “free”.

  15. 15. Amit

    Well, I maximised my RRSP, divided the income amongst the two of us via Spousal RRSP, our home-based business is a partnership so that income is also divided amongst the two of us. I opened non-registered investment account and bought Canadian dividend-paying ETFs in that. All RRSP accounts were made US Dollar accounts at Questrade this year, and hence bought all US-based ETFs for long-term perspective in RRSP accounts. I also started keeping track of my passive income, thanks to your site for the inspiration and reached at almost $200 per month of passive income via dividends, and rental property.

    I also started planning in advance for this year (2009) and have already maxed out the TFSA contributions for both of us via savings that we had been doing just for this since July last year. ING Direct paid us extra $30 each to cover our taxes as we had opened TFSA accounts in advance with them.

    I learnt about super flow-through shares through this website only recently, and hence missed out on that for last year. But will plan to keep around 2-3% of my overall portfolio for that for this year. I am still wary of claiming home-office deductions, and other business expenses, and smith maneuver and hence didn’t do any of that. We like to keep our debts lower and hence I paid 4 extra principal payments on our mortgage to wipe off 2 years off the mortgage this year, and also converted it to use an accelerated bi-weekly payment structure and wiped off another 9 years off the mortgage payments.

  16. 16. Jack

    A tip for prescription med costs – Instead of trying to save all of your little receipts from each prescription you fill, you can just go to your pharmacy in January/February of the new year and they’ll give you a print out of all prescriptions filled in the last year. This print out will have the “total cost” plus the “patient pays” portion of the prescription and will have it totalled at the bottom. I’ve done tax returns for people who have literally had hundreds of individual receipts so just getting a quick print out could save you a ton of time.

  17. 17. Rob

    Thanks for sharing, it’s a good list.
    I have a question regarding medical expenses. We have health benefit from our employer, the expenses for dentist or chiropractor for example are 80% reinbursed. The question is when we claim taxes, should we claim 20% of the total bill or should we claim 100%?
    Thanks!

  18. 18. Peter B

    Hi Rob,

    I am pretty sure that you can only claim out of pocket expenses so claim the 20% plus the premiums deducted from your employer. Keep your pay stub from last year as these amounts do not show up on a T4.

    The same reasoning applies for tuition payments. If you are reimbursed part from your employer then you can only claim the net.

    Note: Always verify with your accountant / tax preparer to ensure that you have captured all your allowable deductions.

    Peter

  19. 19. Rob

    Thanks Peter!

  20. 20. TStrump

    I enter everything on Microsoft Money – when tax time hits, I just run a report which references everything I need.
    Quite often I don’t even have to look at my receipts – I just use my report.
    I usually do my taxes in Jan/Feb, as well, so it gives me plenty of time to maximize my deductions.

  21. 21. Freedom40

    Hi Rob,

    Great list.

    Not sure if you are aware that if you are a self employed sole-proprietors of an unincorporated businesses, #3 (Claiming Home Office) and #4 (Medical Expenses) can be ramped up with the set up of a Private Health Services Plan (PHSP).

    This is like your own health bank account. You can contribute up to $1,500 for yourself and your spouse and $750 per child, however there is a 2-year forfeiture from date of deposit for making claims.

    These “bank accounts” are 100% tax-deductible and can be used for financing all non-covered health-related expenses to make them 100% tax deductible, up to the limits above.

    Every little bit helps!

  22. I wish the US would do something like your TFSA. We do have IRAs which have tax-free attributes, but I think we could do better in the US.

  23. 23. Abid

    Darn, I didnt know about the medical expenses until reading this post. Better late than never. However, I am going to throw this next question out there anyway. Hopefully, someone can help.

    If I have pay stubs and medical receipts from last year AND previous years (which I haven’t claimed), can I also claim the amount from previous years in this tax year? or am I screwed because of my lack of knowledge?

  24. 24. DK

    Abid

    You can claim expenses for any 12-month period ending in the current tax year. Hope that answers your question.

  25. 25. Sabrina

    Abid- I was positive that you could carry over previous unclaimed medical expenses from previous until researching further after reading DK’s post above. Despite my perscription and treatment amounts being considerable they have never been large enough to make a difference on my taxes being a student and having extended heath coverage through my parents work. I found this helpful:

    “For both parts of the medical credit, the total
    qualifying medical expenses will include
    those paid within any 12-month period
    ending in the year. Therefore, you have some
    flexibility in choosing the 12-month period,
    and obviously should pick the period in
    which the most expenses were incurred. In
    the year of death, this period is extended to
    any 24-month period that ends in the year.”

    Borrowed from http://www.apa-ca.com/en/PDF/Tax%20Letter%20September%202008.pdf

    I guess we will both have to round up all of our receipt and see which 12 month period ending in 2008 cost us the most money!

    Rob & Peter,

    In my travels I read that you can claim your 20% paid portion of your benefits but you can only claim your contribution to the plan if it is not taken pre-tax from your income.

  26. 26. gmr

    Can someone give me an easy answer on the medical bills and Charitable donations?.
    Can I add up all my Medical Expenses and Charitable Donations for 2007 and 2008 and can I claim them in a lump sum in each catagory on my taxes.

    Thank you.

  27. gmr, i’m not sure about medical expenses, but I know that you can add up 2007 and 2008 charitable donations and claim it under one spouse.

  28. 28. Chuck

    For the medical expenses the decuction is allowed for 12 months of expenses as long as the 12th month falls in 2008.

    For example on the 2008 taxes I could write off expenses from Feb 1, 2007 to Jan 31, 2008

    http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/lgbl-eng.html

  29. 29. nobleea

    FT, how do capital loss carry backs work? Do you essentially amend your previous years tax returns?

    What if you owe money for this tax year (not due to capital gains), but then the loss carry back would give you a refund for previous years? Do you still pay the amount owing and then they’ll refund you for the previous years based on the amendment?

  30. Nobleea, you may have to contact an accountant on that question. I’ve claimed capital losses before, but it was an accountant who took care of it.

  31. 31. DK

    noblea,

    you don’t amend previous year’s return, you simply file a T1A with this year’s return, http://www.cra-arc.gc.ca/E/pbg/tf/t1a/README.html

    As to your second question, you will see from the form itself, you can apply the refund to any 2008 taxes owing.

    No need to hire expensive accountants, a simple search on CRA’s website does the trick.

  32. 32. Arisnel

    Hello! I would greatly appreciate it if anyone could answer the following burning question for me. My wife and I have two children (both under four years old). My wife runs a family day care at home and obviously our children attend her day care. The question is this: can we pay child care to the day care and claim child care expenses later when we file our income taxes? And if this is possible, would it be in our advantage to do so?

  33. @Arsinel CRA states that you can’t claim child care expenses if the child care was provided by someone who isn’t arm’s length. In other words a mother, father, etc. Here is a description from CRA that should help: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/214/pymnts-eng.html

  34. 34. Arisnel

    @Dan Thanks a lot, Dan. I appreciate it.

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