The Canada Revenue Agency (CRA) doesn’t mess around when it comes to tax time, which is why Canadians shouldn’t either. If you’re looking for legal methods of reducing your tax income, there are certainly ways to do so, even for lower-income Canadians.
Reduce taxes and save
One of the best ways for Canadians to save on taxes is by contributing to their Registered Retirement Savings Plan (RRSP). The RRSP is a tool Canadians can use to save for retirement. Each year, Canadians will receive a Notice of Assessment from the CRA. On it, they’ll find the deduction limit for their RRSP.
This limit is the limit on how much you can contribute to your RRSP for the year. As long as you stay within it, however, you could contribute far less and still increase your savings.
How so? That’s where the fun comes in. The CRA allows Canadians to deduct the money put into their RRSP from their taxable income for the year. This can bring you into an entirely new tax bracket. Now, let’s see how that works.
How much you could save
The amount Canadians will save on their taxes will mainly come down to location. Those in Ontario pay different provincial taxes than those in Manitoba, for example. However, there are plenty of online tools to help you calculate exactly how much you need to contribute to get into a lower tax bracket.
This new tax bracket could save even a lower-income earner thousands. Today, we’ll look at an example from Ontario for an Ontarian making $51,000 per year. In Ontario, taxes are 20.5% at this amount but 15% if lower than $50,198. Federally, taxes are 9.15% at this amount and 5.05% if under $46,226. Ideally, Canadians want to hit that $46,226 amount.
If you didn’t put anything into your RRSP, that would mean you would owe the CRA $7,794 in taxes for the year. However, if you were to put in just $4,774 to reach that $46,226 level, you would bring your taxes down to $6,430! That’s savings of $1,364!
Remember, it’s investing!
You might be thinking, why would I put $4,774 into my RRSP if I’m only saving $1,364 at the end of the day? That’s a large financial commitment, and, indeed, you don’t want to strain your finances. However, if spaced out over a year, that $4,774 turns into just $397.33 each month. And remember, this is investing towards your future retirement, taking that cash and turning it into even more cash.
For example, let’s say you were to put that $4,774 into a stock like Telus (TSX:T) on the TSX today. Telus stock is a great choice as it’s one of the top telecommunications companies in Canada. Plus, it’s valuable right now due to the volatility surrounding a merger between Rogers and Shaw. Despite this, the stock has dropped below its fair value, with shares trading at 23 times earnings and now offering a dividend yield of 6.33%.
So, if you were to put that $4,774 towards Telus stock today, here is how much that would get you just this year alone.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| T | $23.51 | 203 | $1.45 | $294 | Quarterly |
As you can see, you’re already adding even more to your retirement income from an investment such as Telus stock. This is why you’ll be making more and more money, while savings thousands in taxes each year.
