Saving tax all year

Tax season is approaching, which means looking for credits and deductions to pay less tax wherever possible. However, other opportunities are available to save tax that may be implemented at any time during the year.

Here are various tax-saving strategies—some familiar and others specialized. Perhaps one or more might benefit you, now or in the future.

Income-splitting with TFSAs. You can take advantage of income-splitting by gifting funds to your spouse or children that they contribute to their Tax-Free Savings Account (TFSA). This way, more of the household or family wealth grows tax-free.

Opening a spousal RRSP. If your spouse is in a lower tax bracket, one of the three advantages of a spousal Registered Retirement Savings Plan (RRSP) may apply to you. First, if you retire before age 65, pension income-splitting is mainly limited to an employer’s registered pension plan payments (except in Quebec, where you must be 65 or over to split pension income). However, a lower-income spouse can withdraw retirement income from a spousal RRSP before age 65, taxed at their lower rate. Second, with a spousal RRSP, you can split more than 50% of pension income in situations when that saves you more tax. Third, although you must close your own RRSP at age 71, if you have earned income and your spouse is under 71, you can contribute to the spousal RRSP and claim the tax deduction.

Making RESP withdrawals. When it’s time to make Registered Education Savings Plan (RESP) withdrawals, you can save your child tax by making the withdrawals strategically. An RESP has two pools of funds. One is your contributions, from which you can make non-taxable withdrawals. The other comprises grant money and investment growth, and withdrawals from this pool are taxable. Generally, you want to withdraw from the non-taxable pool when your child’s income is higher, and from the taxable pool when your child’s income is lower.

Lower-income spouse invests. This strategy is simple yet effective. The higher-income spouse pays for all of the couple’s or family’s expenses, enabling the lower-income spouse to invest their own income in a non-registered account. Investment income is taxable at a lower marginal rate.

Vacation property upgrades. Keep receipts for capital improvements, such as a new boathouse or deck, or replacing the dock, septic tank or roof (repairs are not eligible). These costs reduce the capital gain, resulting in less tax when you sell or transfer the property.

Sharing pension income. Splitting pension income is a well-known strategy in which the higher-income retiree allocates up to 50% of their eligible pension income to their spouse. But spouses can also potentially save tax by splitting their Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) payments. This is known as pension sharing. The government reduces the higher-income earner’s benefit and increases the lower-income earner’s benefit, basing their calculation on the period the couple has been living together.

Leaving a RRIF to charity. If you’ll have funds remaining in your Registered Retirement Income Fund (RRIF), you can designate a charity as the beneficiary of your RRIF assets. Your estate receives a donation tax credit for the full value of the donated amount, which offsets the tax liability on the RRIF balance. In effect, the tax your estate would normally pay on the RRIF assets goes to a charity instead of the Canada Revenue Agency (CRA).

Claiming home office expenses

Are you a full-time employee who works from home? You’re eligible to claim expenses if you spend more than 50% of your work hours at your home workspace for at least four consecutive weeks.

Agreement with your employer

The work-at-home arrangement doesn’t need to be mandated by your employer. You can request a formal arrangement, and the agreement can be written or verbal. However, to claim home office expenses, your employer must provide you with a completed and signed copy of Form T2200, Declaration of Conditions of Employment.

The detailed method

The simplified flat-rate method of claiming home office expenses was only available in the 2020 to 2022 tax years, offered in response to the COVID-19 pandemic. Now you must use the detailed method, which involves completing Form T777, Statement of Employment Expenses.

For information on eligible expenses and submitting your claim, visit canada.ca and search for “Home office expenses for employees.”