This year, it’s more important than ever to minimize your taxes. With COVID-19 taking a bite out of business, your portfolio is probably feeling the heat. While the markets have recovered since the March stock market crash, they’re still down from all-time highs. Unless you initiated new positions “on the dip,” your portfolio is likely down.
Ultimately, there’s nothing you can do about that except wait. However, it’s entirely within your power to offset the losses. By using tax deductions, you can boost the tax refund you get from the Canada Revenue Agency.
That could go a long way toward offsetting any investing or income losses you’ve suffered this year. With that in mind, here are five of the most powerful tax breaks you can claim to get some relief from the CRA.
Dividend income is generally taxed by the Canada Revenue Agency. However, any eligible dividends you receive get a tax credit. If you hold a dividend stock like Fortis Inc (TSX:FTS)(NYSE:FTS), the value of the dividends is “grossed up” (increased) by 38%, and a 15% credit is applied to the grossed up amount. The “gross-up” is to account for the fact that the corporation already paid taxes before paying you the dividends.
RRSP contributions provide valuable tax deductions that can save you money. Any amount you contribute to an RRSP (up to a limit) reduces your income by that amount. In so doing, it reduces your taxes. If you contributed $10,000 to an RRSP, you’d take $10,000 off your taxable income.
You’d also defer your dividend and capital gains taxes. To return to our Fortis example: if you held your FTS shares in an RRSP, you wouldn’t pay a penny in taxes on them until retirement. In the short term, that would save you even more money than the dividend tax credit.
Capital losses are another great tax break that can benefit investors. Any time you lose money selling stocks, you can use the losses to offset gains on other stocks, which can result in lower capital gains taxes. Here again, FTS is a great example. Down 1.6% year-to-date, it could be sold at a slight loss to offset taxes paid on other stocks.
Employment expenses are a great tax break that can save you some money come tax time. Everybody knows that small businesses can claim deductions. What many people don’t know is that regular employees can, too. Professional membership dues, transportation costs, and lodging can all potentially qualify.
If you aren’t sure whether a particular expense is tax deductible, speak with an accountant. It can be more than worth it in how much it saves you come tax time.
A final category of tax deductions to go over is business expenses. You probably know that businesses can deduct their expenses. What you may not know is that you could be operating a business yourself without intending to!
If you’re renting an apartment in your house or doing side work as a freelancer, you could be considered self-employed.
If that’s the case, then you can claim far more deductions than the average employee. Again, it would be wise to speak with an accountant before claiming any business deductions because some of the rules on this topic are complex.
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Fool contributor Andrew Button has no position in any of the stocks mentioned.