pay less income tax in Canada

As each year comes to an end, it helps to start thinking of possible ways to pay less income tax and maximize your tax return. Filing your income tax and benefit return does not have to defeat you. You can easily process yours through an online software like TurboTax or H&R Block to reduce the taxes you pay. 

This guide helps you to lower your income tax payable. Keep reading to find possible ways to maximize your income tax and benefit return. These 30 practical ways can help you pay less income tax in Canada for 2023.

1. Take advantage of your Registered Retirement Savings Plan (RRSP)

Maximizing your RRSP contributions for the year reduces your taxes whether you work for an employer or yourself. Your RRSP contributions qualify you for larger tax deductions. In turn, these deductions pare down your tax payable in the year that you claim them. Voilà, you to pay lower taxes. 

Your contributions in your RRSP grow tax-free until you withdraw your money in retirement when your income tax rate drops much lower. Why does that work out? That means that your income tax bill should dip too.

2. Hire a family member

You may have access to certain tax benefits when you hire a family member as a self-employed individual. Consequently, you can claim the payroll expense on your business income.  Even better, you still manage to keep the business income within your family. 

3. Deduct home office expenses

You can reduce the income tax you pay by claiming home office expenses. Following the COVID-19 pandemic, the Canadian government simplified the process for claiming work-from-home employment expenses. A temporary flat rate work-from-home expense claim method applied for taxes from 2020 to 2022. If eligible, you could have claimed a tax deductible of $2 for every day you worked from home up to $500.

However, the rules have changed for 2023. As a result, you can only claim a percentage of your home expenses for select budget lines. Eligible expenses that you can claim include rent, utilities, internet fees, supplies, long-distance calls, etc. This still helps lower your overall tax burden.

4. Maximize your employer benefits

Most employers give certain benefits to their employees. Make sure to explore all that apply to you and take advantage of them. For example, some employers offer to match your RRSP contributions. This can increase your RRSP contributions for the year and reduce the income tax that you pay. 

However, you must track your RRSP contribution room for the year. This applies particularly if you also make personal contributions to a separate registered retirement savings plan.

Aside from pension contributions, other perks can lead to more money for your pocket. This includes benefits or reimbursements for health-related costs, employment relocations, work-from-home benefits, educational and professional development expenses, etc. 

Of course, you cannot claim expenses that have been reimbursed by an employer when filing your income tax and benefit return.

5. Get tax credit for donations

Each year, you get tax credits for charitable donations that you make to a registered organization or recognized donee. However, you need to make the donations by December 31. You can reduce your income tax if you did not claim the donations tax credit in the past five years. This also applies to any eligible donations made by your spouse or common-law partner. 

When you make claims on an eligible amount of a gift, the CRA applies a limit that is 75 percent of your net income.

The applicable tax savings on eligible donations are non-refundable. This means that you can use it to reduce any tax amount you owe. Yet, if you do not owe any, the tax credit for donations that you have made will not get refunded to you.

6. Contribute to spousal Registered Retirement Savings Plan (RRSP)

If you cannot contribute to your RRSP, you can contribute to your spouse’s or common-law partner’s RRSP until they turn 71. However, note that this reduces your RRSP deduction limits for the tax year. This can enable you and your spouse or common-law partner to split income from RRSP withdrawals in retirement. Depending on your income brackets, this may result in lower income taxes.

7. Deduct moving expense

You can claim tax credits on line 21900 of your income tax and benefit return when you move for employment or self-employment purposes. You will need to calculate your eligible moving expenses by using Form T1-M, Moving Expenses Deduction. Generally, when you have eligible job- or school-related moving expenses, you can reduce your taxable income by deducting relocation costs. 

As a full-time student, you can use the moving expense claim to reduce your taxable income. Thus, you can apply it against benefits such as research grants, scholarships, fellowships, bursaries, etc. Also, what if you move as a result of work, such as a summer work placement, co-op, or even to run a business? In this case, your related moving expenses can get deducted from your income earned in the new location. Eligible relocation costs that you can claim include costs to:

• transport and store your household items;
• travel between locations such as vehicle expenses travel meals and accommodation;
• fund your temporary living expenses as a result of the move for up to 15 days;
• cancel your old housing lease;
• change your home address, replace driving licenses and other permits;
• utility setup and disconnections;
• maintain your old home such as interests paid, property taxes, utilities; 
• sell your old home and buy a new home.

Note that some moving expenses may not qualify for a tax credit. For example, costs to forward your mail, clean your home, replace personal items, look for a job do not quality. Additionally, you must have moved at least 40 kilometres closer to your new work, business, or school.

8. Claim child care costs

If you had to pay for child care, you can reduce your taxes by using the childcare tax credit. This applies as a result of working for an employer or yourself, attending a school program, or carrying out research.

You can only claim childcare costs for an eligible child. The CRA considers an eligible child as your child or your spouse’s or common-law partner’s child under the age of 16. However, if a dependent has an impairment or disability, then the age limit gets extended.

Additionally, what if a child with a net income of less than $15,000 in 2023 relies on you, your spouse or common-law partner? Well, then they can qualify you for the childcare cost tax credit. 

When claiming the childcare credit, the dependent must have lived with you or your partner as you incurred the expense. Generally, you may claim only childcare payments made to a Canadian resident in Canada except in certain situations.

The eligible childcare expenses can include caregivers, services at daycare centres and educational institutions, day camps and day sports schools. Each one must have a primary goal to care for children, including boarding schools or camps with lodging. 

You can claim these expenses on line 21400 of your income tax and benefit return. You simply calculate the child care deduction using form T778 Child Care Expenses Deduction. Depending on your circumstances, you may claim up to $11,000.

9. Write off capital losses

If you have made any capital gains in the year, they will get taxed at an inclusion rate of one-half of your gains. Capital gains generally arise when you dispose of a property through a sale or transfer. As a result, the deemed proceeds exceed the adjusted cost base of the property. 

For example, if you purchased a financial asset for $100 and sold it for $150, you will gain $50. For capital gains tax purposes, only half of this gain, $25, will get taxed.

Conversely, you get capital losses when you dispose of assets at a lower price than the adjusted cost base. At this point, you also factor in any selling costs.  Similarly, if you had made a capital loss when disposing of your capital asset, your allowable capital loss will equal half of your loss. 

If you have a capital loss in a year, you can use it to reduce your capital gains in the same year. 

10. Use carried-over net capital losses

If your allowable capital loss in a year exceeds your capital gain, this will result in a net capital loss.

Generally, if you don’t use your net capital loss in the current tax year, you cannot apply it to your general income. Yet, you can carry it backwards then apply it to capital gains as far back as three years. You can also carry your net capital loss forward to offset capital gains in the future. 

So, how do you apply your net capital loss to a year other than the year in which you made the loss? You fill out a Schedule 3 form for Capital Gains (or Losses) and submit it with your income tax return.

11. Defer capital gains tax by claiming a reserve

When you dispose of a capital property and receive the full payment in a year, you could pay big. Typically, you would face a 50-percent tax on any capital gains you make. However, when you receive the payments for your capital property in installments, then you can claim a capital gains reserve. 

Claiming a capital reserve reduces the capital gains tax that you have to pay for the year. This strategy works if you want to carry forward gains to a future year. After all, you can expect to have a lower tax rate or incur capital income losses. 

To claim a capital reserve, you must fill and submit Form T2017, Summary of Reserves on Dispositions of
Capital Property. Generally, you can claim capital reserves for up to four years, except in certain situations. 

You may not qualify to claim the capital reserve in a tax year if you lived outside Canada. Restrictions also apply if you were exempt from paying tax at the end of the tax year or at any time in the next year. Further, if you sold your capital property to your own corporation, you may not qualify to claim capital reserves. 

12. Claim the capital gains deduction

You may qualify for the cumulative capital gains deduction and reduce your taxable capital gains from the disposal of certain properties. Which properties remain eligible for capital gains deductions? The list includes qualified small business corporation shares and qualified farm or fishing properties. 

Generally, only deemed or actual Canadian residents throughout the year can claim the capital gains deduction. It gives eligible individuals cumulative lifetime capital gains exemptions (LCGE) against net gains realized when they dispose of qualified property.

For qualified small business corporation shares, the cumulative capital gains exemption stands at $913,630 for 2022 and $971,190 for 2023. However, as only half of the realized capital gains remains taxable, the deduction limit is $456,815 for 2022 and $485,595 for 2023.

Due to the complexity of this process, and the demanding and specific requirements, we recommend seeking the advice of an accountant.

13. Get the home buyer’s credit

You can get up to $10,000 for this credit if you or your partner purchase a certain home for the first time. When you file, make this claim on Line 31270 for the Home buyers’ amount. 

The qualifying home must be registered in either of your names and must be in Canada to qualify for the credit.

It could be an existing home or a home under construction, such as single-family homes, semi-detached or townhouses. You can also purchase a mobile home, condo, apartment or shares in co-operative housing that gives you an equity interest. 

Any shares in co-operative housing that only gives you the right to tenancy does not qualify for this credit. Also, you must occupy the home as your principal place of residence within a year of acquisition. You can claim the $10,000 amount in full or split it with your spouse or common-law partner.

14. File electronically using a tax software

When you file your income tax using certified tax software with NETFILE, you can get your tax refund faster. This electronic filing system usually delivers your refund within two weeks. An electronic filing method gives you access to various free and paid software certified by the Canada Revenue Agency (CRA). Using software like TurboTax and H&R Block reduces your taxes as they identify more tax credits and deductions.

15. Claim the Canada Workers Benefit (CWB)

You may qualify for the Canada Workers Benefit refundable tax credit if you earn a low income. By claiming it as a basic amount or as a disability supplement, you may receive up to half of the benefit in advance. To qualify for the advanced payment, apply via your CRA My account profile or fill out Form RC201 by Aug. 31. 

To claim this benefit, you have to have turned 19 by Dec. 31 of the applicable tax year. You can claim the Canada Workers Benefit electronically or by filling out Schedule 6 if you file a paper tax return.

16. Claim tuition fees and other education expenses

You can claim education-related expenses such as tuition fees for post-secondary education in Canada. This applies to courses that develop your skills for purposes certified by the Minister of Employment and Social Development. 

Additionally, if you paid fees for an occupational, trade or professional association exam, you may qualify for the tuition tax credit. If a federal, provincial or territorial job-training program has reimbursed or covered your tuition, then you cannot claim this credit. 

17. Maximize your Tax-Free Savings Account (TFSA)

Your tax-free savings account works as a tool to grow your income without having to pay taxes on it. To clarify, you do not receive tax deductions for your contributions to a TFSA like the registered retirement savings plan. Yet, you can reduce your income taxes substantially when you grow your income through a tax-free savings account. 

How does this work? Since your TFSA contributions apply to your after-tax income, you avoid paying tax on investment income in your TFSA. First, check that you have enough contribution room for your TFSA before you contribute. That way, you don’t pay a one-percent tax on the excess amount for every month it remains in the account. 

18. Claim interest on student loans

On Line 31900 of your income tax return, you can claim the interest paid on your student loans. You can claim this amount in the current tax year or the previous five years for post-secondary education. This only works if you received the loan through either of the following:

• • the Canada Student Loans Act

• • the Canada Student Financial Assistance Act

• • provincial or territorial government laws similar to the acts above

Under certain conditions, you can carry forward your claim on interest for student loans for up to five years. Further, you can only claim interest payments for student loans that you have not claimed previously. 

19. File your taxes before the deadline

Typically, you don’t earn any tax credit or deduction for filing your income tax and benefit early. However, when you file by deadline, you avoid paying any fees or penalties and keep more money in your pocket. 

Also, when you file your tax return early, your processing time may get shorterned. That way, you will receive your tax refund faster whether you submit your return electronically or on paper. 

20. Hire a tax professional

Filing an income tax return may seem straightforward if you have a basic source of income, such as a single T4. However, when your income situation becomes complex, it helps to hire an accountant or a tax professional. A tax professional can assist you in exploring various tax savings that you may not recognize as a novice. 

The cost-benefit analysis compares how much you pay for professional tax-filing services with your expected claim in tax credits and deductions. If you make business or property income, you could claim professional income tax-filing fees. This applies if you earn income from self-employment or rental or investment income.

21. Take advantage of the medical expense tax credit

If you or your partner paid for certain medical expenses within a tax year, you can claim them. The medical expense tax credit for the current tax year only applies if you did not claim these costs previously.

You can also claim eligible expenses for your dependents. This include your children, grandchildren, parents, sibling or other family members who lived in Canada at any time during the year.

For example, you can claim dental services, hearing aids, heart-monitoring devices, hospital beds and services and in-vitro fertility programs. Further, keep your bills for laser eye surgery, orthodontic work, prescription drugs, pre-natal and post-natal treatments and many expenses.

22. Incorporate your business

Registering your business as a corporation can help you claim more deductions as business expenses. Also, you may get taxed at a relatively lower corporate tax rate compared to your personal income tax rate. 

If you have yet to incorporate your business, your income will get taxed at your personal income rate. Including your business income in your personal income can move you into higher tax brackets, causing you to pay higher income tax. 

23. Coordinate with your spouse for transferred credits

Most tax credits and deductions apply to you, your spouse, or your common-law partner. This allows couples to coordinate and reduce taxes for whoever the tax credits or deductions benefit the most. 

For example, if you have certain non-refundable tax credits, you may be able to transfer them to your spouse. This works when you cannot apply credits or deductions related to caregiver, education, child care or other allowable deductions.

24. Explore provincial and territorial tax benefits

In addition to federal income taxes, you also have to pay provincial and territorial taxes. As a result, you may qualify for tax credits and deductions through your province or territory. 

For example, if you file your taxes in Alberta or Ontario, you can claim tax credits for adoption and medical expenses. These claims ultimately reduce your overall tax burden. 

25. Claim the northern living tax allowance

You experience many benefits by living in the north. On top of frequent views of the northern lights, you also receive a tax allowance from the Canadian government. If you lived in a northern region, you can claim a certain amount when filing your tax return. This Northern residents deduction appears on line 25500 of your income tax and benefit return. 

There are two types of Northern residents deduction:

• the residency deduction for having lived in a prescribed zone
• a deduction for travel benefits you received from employment in a prescribed zone that are reported as your income.

The residency deduction has two claimable amounts, the basic residency amount and the additional residency amount. To claim this deduction, you must have lived in a prescribed zone continuously for at least six consecutive months. 

26. Use the Canada Training Credit to reduce your taxes

As a qualifying student in an eligible educational institution, you can use the Canada Training Credit (CTC) to minimize your tax payable. If you lived in Canada for the whole year, you can claim the CTC for eligible tuition and educational fees. This applies to anyone from ages 26 to 65.

Additionally, you can claim the CTC if you have a Canada training credit limit (CTCL) for the current year or a reassessment for the previous year. For every Canada Tax Credit you claim, it reduces your Canada training credit limit for future years. 

27. Deduct union fees or professional dues

You can reduce your income tax by claiming certain employment expenses, such as union fees and professional dues. You can claim eligible expenses if you paid them or if your employer did then included them in your income for the tax year.

According to the Canada Revenue Agency (CRA), you can claim related employment expenses, such as:

• • annual dues for membership in a trade union or an association of public servants

• • professional board dues required under provincial or territorial law

• • professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law

• • parity or advisory committee (or similar body) dues required under provincial or territorial law

Hoever, you cannot claim expenses for licenses, initiation, special assessments, etc.

28. Claim carrying charges and interest expenses

Most people don’t know they can claim investment management fees for non-registered or tax-sheltered accounts. You can also claim fees that you paid for certain investment advice. 

Other carrying charges that you can claim when you file your tax return are 

• • Interest paid on loans for investments that yield interests and dividends. If you borrow to invest in assets that only earn capital gains, you may not be able to claim the accompanying interest rates.

• • Legal expenses for child-support payments

• • Professional fees to file your taxes if you have a business or property income

29. Use exploration and development expenses tax credit

Canada is the world leader in oil and gas stocks so many Canadians invest in energy stocks and exchange traded funds (ETFs). However, if you directly invested in energy companies involved in exploration, then you can use this tax credit. These apply to passive investments in petroleum, natural gas, mining, or certain clean energy generation and energy conservation ventures. 

To claim this tax deduction, your investment should not constitute a normal business operation. You will need to complete and submit Form T1229, Statement of Resource Expenses and Depletion Allowance. 

30. Deduct spousal and child support payments

Following a separation or divorce, spousal support payments made under a court order can be claimed when you file your tax return. Generally, child-support payments do not qualify as income to the recipient, so these amounts are thus not deductible by the payer.

On the other hand, spousal-support payments under a court order equal income to the recipient. As a result, they can get deducted by the person paying, provided that the order or agreement clearly states the amount. Of course, you can only claim fully paid outlays.

Key takeaway

In summary, you have various ways to reduce your tax obligations in Canada. First, identify which tax credits and deductions apply to you and claim them accordingly. Second, keep supporting documents when claiming income tax credits and deductions. After all, the Canada Revenue Agency may request to assess your tax returns in detail.

Without documentation, you may lose out on tax credits or deductions. Further, you could owe more if a tax credit or deduction has already been applied. This also applies if a tax refund has already been paid to you. Yet, you have many opportunities to seize on savings based on the 30 approaches in this list.