In our journey to build wealth we are constantly looking for ways to increase revenues, reduce expenses and invest wisely.
If you earn more than $20,000 per year guess what is one of your biggest expenses…
In Canada, a person in a higher income bracket is already paying more than 50% of his income in taxes. If you add sales tax, property tax, gas tax, cigarette tax, alcohol tax, corporate tax, school tax, import duty, and all the other taxes I don’t even know about, high earners are getting a royal screw by the government and by the rest of us less well-off people.
Canada is a wonderful country. We have so many social programs which are the envy of so many other countries in the world. But, please people, be aware that all those social programs are not free. Someone is paying for all of them. I will take a second to express my gratitude to all the tax payers who support our social system. Thank you!
However, as much as a society benefits from the tax revenues, it’s the responsibility of each individual to find legal ways to reduce his/her taxes.
Here are some tips to reduce the tax burden:
Change your source of income
For some reason, our government has decided to tax different sources of revenue in different manners. Employment income and interest revenues are taxed at a higher level than dividends and capital gains.
Let’s look at some examples. Assume that your tax bracket is 40%
If you earn $50,000 in salary, you pay $20,000 in taxes (ouch)
If you earn $50,000 in interest, you still pay $20,000 (ouch again)
If you earn $50,000 in capital gains, you will pay $10,000 (this is more humane)
So, the trick is to change your income as much as you can from salary and interest to capital gains.
In addition, the government has created special accounts which allow us to pay NO TAXES (such as the Tax Free Savings Account) or accounts which allow to defer taxes many years into the future ( Registered Retirement Savings Plan).
Pay your taxes decades later
How would you feel if you have a debt and your are allowed to pay it 10, 20, or 30 years later. Would you take it?
This is exactly what the government allows you to do when you open a Registered Retirement Savings Plan (RRSP) account. The taxes that you owe today could be paid decades from now.
Assume again that you earn $50,000. You can take $18,000 and deposit it in your RRSP account. Now your taxable income is $38,000. Your tax bracket is reduced. You pay a smaller percentage of taxes on a smaller amount of money. When you retire at age 65, you can withdraw your $18,000 plus whatever gain it made and you will pay regular income tax on that money.
Pay $0 taxes
This is the biggest gift the Canadian government has given to taxpayers. We are all allowed to open a Tax Free Savings Account (TFSA). Money in a TFSA can grow 100% tax free. The only drawback is that there is a limit in the amount of money we can deposit in a TFSA. For 2016 the limit is $5,500.
Tax reduction is the low hanging fruit. Very few of us use all the opportunities we have at our disposal to reduce our taxes and our expenses.
Many people consider tax self education very boring, but this kind of education can pay high dividends for the rest of your life and remember, dividends are taxed at a lower level.