So yes taxes are one of our biggest burdens, but there are ways to reduce them!
Like mentioned in an earlier article there are several methods of reducing the tax you pay on your income, common methods are: RRSP, Donations, Charitable giving’s, Levering (Investment loan) and the best method is home based business.
Registered Retirement Savings Plan (RRSP) is a savings plan for retirement, duuuhhhh. I will provide more info regarding RRSP later on, but I’ll give a brief overview here. When you contribute to your RRSP you reduce your taxes, when a contribution is made it reduces your pre-tax income therefore you pay less tax.
Your income is $75,000 so you pay tax on $75,000.
You make a $15,000 (given you have contribution room)
Your income now is $60,000 so you pay tax on that amount.
However if you withdraw from your RRSP you are fully taxed at your MTR. And you shouldn’t be withdrawing from your RRSP since it is intended for your retirement.
If you make a donation to a charity, it is tax deductible as well. The higher your donation the higher your reduction.
Same concept as donation, however you can make larger contribution through life insurance policy. You take out a life policy on yourself and name the charity as the beneficiary, you will receive tax receipt from the charity and reduce your taxes. Note that the charity will want an irrevocable beneficiary.
This is a wealth accumulation strategy, but it can save you taxes as well. Leveraging is when you take out a loan for an investment, again more about this strategy in a later article. When you take out a loan you obviously have to pay interest on the loan, say you take a $100,000 loan at 5% interest. You will be paying about $5000 in interest per year, but since it’s a loan for an investment the CRA allows you to deduct the interest. Your $75,000 income is now $5000 so you save the tax on the $5000. Not only can you take advantage of the large investment but also the tax reduction.
Home based business
Now the best and most attractive method of saving on taxes is having a home based business. However you need to be VERY careful with the type of business you choose, some can be a scam others not as beneficial. With this method you can potentially write off most of your regular expenses such as gas, insurance and phone. Depending on your advisor you may also benefit from contributing some of your income to your spouse and child, hence reducing your taxes even further. The other benefit of this strategy is that you can earn extra income, now you are not only reducing your taxes but can increase your income. Again you have to be able to choose the right business; I will try to discuss some of the best potential home based businesses later on. This strategy is somewhat more difficult to understand if you are interested in this method contact me for more details.
Taxes do not have to be a burden, all you need to do is understand the tax system and some tax laws.
People don’t plan to fail…….they fail to plan!