We are in the thick of tax season, and the personal income tax filing deadline is May 2nd, 2022 (April 30th falls on a Saturday this year). Preparing your return and paying taxes can feel frustrating, but there are things you can do to reduce taxes owing.
Thoughtful planning with your investments can be a significant component of your tax strategy. It might be too late for this year, but having the information now can help you prepare for your 2022 tax return. Here’s how:
Strategize your RRSP, RESP, and TFSA contributions
Utilizing your tax-free and tax-deferred accounts to the maximum can lower your tax bill at the end of the year. Your Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP), and Tax-free Savings Account (TFSA) can all help you save money on taxes.
RRSP Contributions
Contributions you make to your RRSP will reduce your taxable income. Usually, you can contribute up to 18% of your income from the previous year up to a maximum. 2021’s maximum contribution amount was $27,830. You can find your maximum contribution allowance for this year on the previous year’s Notice of Assessment.
Increasing your annual RRSP contributions will allow you to reduce taxable income and save significantly on tax payments. Depending on your income, you could save thousands of dollars.
The money saved in your RRSP will grow tax-free until you start withdrawing funds in retirement. Then, because your income and tax rate will be lower in retirement, you’ll pay less tax on that money at withdrawal. Some retirees might even receive a tax refund depending on their financial situation.
Spousal RRSP Benefits
You can also consider income splitting with a spousal RRSP. This strategy moves funds from the higher-income spouse to the lower-income spouse. The higher-income partner can contribute to the RRSP of the lower-income spouse within their available limit. As a result, the couple will benefit from an overall lower tax rate. The lower rate is because the higher income partner can receive a deduction for tax purposes in the year they contributed.
Then, later, when they withdraw funds from the lower-income spouse’s RRSP, they’ll pay fewer taxes on those funds because they will be taxed at the lower-income spouse’s tax rate.
RESP Contributions
Investors use RESPs to save money for their children’s post-secondary education. RESPs are an excellent way to help your children in the future and come with some tax savings benefits in the meantime.
RESPs also grow tax-free throughout the plan, and the growth is taxed when the recipient takes the money out. Because your child will be the recipient of withdrawals and will have a lower income and tax rate while attending school, they’ll pay lower taxes on that income.
Plus, the Government of Canada offers the Canada Education Savings Grant. This grant can match 20% of up to $2,500 of your contributions to your kid’s RESP each year – to a lifetime maximum of $7,200. We encourage you to take advantage of this opportunity.
TFSA Contributions
In 2021, the TFSA contribution limit was $6,000. Unlike RRSPs and RESPs, these contributions are already taxed dollars, so you cannot reduce your taxable income with TFSA contributions. However, the investment grows tax-free, and no tax is required when you withdraw funds from the account.
TFSAs are also more flexible than RRSP accounts. For example, you can access your funds easily without penalty, depending on the account. Then, the amount you withdrew can be re-contributed the following tax year.
Fincor Financial can help with taxation strategy
Creating a smart taxation strategy with your investment accounts can help you reduce taxable income and save money every year. Your financial advisor at Fincor Financial can help you create a plan now to save on your 2022 tax return.