Many of us are paying more in taxes than they should and most people don’t even realize it.
Whether you are an employee or own their own business, retired or still working – many opportunities exist to lower your tax bill and put more money in your pocket.
Related: How Does CRA Decide Who to Audit?
Here are a few ways we pay too much in taxes and what you can do to lower your tax bill if you are in the same situation.
A Family Has One Main Income Earner
If a family has one main income earner, he/she is likely paying taxes at a marginal rate that would be higher than if the income were spread out over other family members.
As an example, if a household has one income earner who makes $100,000 per year they will pay $26,912 in taxes (assuming you live in Ontario).
On the other hand, if the same household has two family members making $50,000 per year, they would pay a total of $17,774 in taxes – or 33% less.
These numbers are based on rates from last year and don’t take into account any other credits or deductions.
Here are a few ideas to spread income out over other family members and lower your tax bill:
- If you own your own business, consider hiring a family member to help out with the business. You could pay them a salary for the work performed. This would reduce the amount of income in the business (the salary can be deducted) and allows the money to remain in the family. Just remember that the salary has to be reasonable and for work that was actually performed
- If you are retired, consider pension income splitting to reduce your income tax bill. Individuals over 65 years old can allocate up to 50% of their eligible pension income to their spouse which reduces the marginal tax rate
- If you are middle aged and still working, consider having both spouses work and sharing the duties of raising children (if you have any). Assuming all other things equal, the taxes paid from two different income earners at a lower income is less than the taxes paid on one higher income earner.
Income is Only From One Source
The majority of us receive income from employment while working. This means that the more we earn, the higher our marginal tax rates will be and the more taxes we will pay. Here is a simple solution to this problem: start your own business.
If you start your own business, you would (presumably) spend more of your time and energy building your business and less time working as an employee.
Small businesses are able to deduct reasonable expenses related to their business. Employees can do this but there are way more restrictions for employees.
Owning your own small business means you can increase deductions, diversity your income (decreasing your taxes paid), split income with family members by paying them a reasonable salary and build equity within the business.
Bottom line: income from a small business means you can increase the amount of deductions available to you.
If you already own a small business and draw income in the form of salary or dividend, you may not be minimizing the amount of taxes you pay.
Different sources of income are taxed differently and depend on your personal situation.
For example: if you draw a salary from your business but already have a high income from employment, you are likely overpaying on taxes and might benefit from less salary and more dividend income. Ask your tax professional to determine the optimal salary/dividend mix if you draw income from your business.
If you are retired and draw income from one source such as an RRSP, you may be better off drawing income from other sources (if possible) such as a TFSA.
Missing Opportunities for Recovery in a Tax Return
When mistakes, errors or omissions are done on a tax return that could be in your favour, many people just assume that there is nothing they can do about it and move on. This is untrue – an individual can go back as far as 10 years to correct an error in a tax return.
Related: Common Tax Myths
Let’s say you do your own tax returns each year but forgot to claim tuition credits in 2007. You can go back and file an amended return for that year that would include the credits and reduce your taxes.
Related: Fixing Tax Return Errors
It’s worth a look to see if you may have made any mistakes from the past 10 years to see if you can get money back
Conclusion: by spreading income out over several family members, diversifying your income to include more than one source and looking to past tax returns for any possible mistakes you can avoid overpaying on your taxes.
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