It's tax season! As you review your tax slips for the year, take a moment to consider the overall picture. There may be opportunities to reduce the amount of income taxes you pay.
Step 1: Confirm your total income
Start with gathering your tax slips to get a better understanding of your total taxable income. This includes T4s for employment income, government benefits and retirement income, and T5s for investment income.
- Are the amounts correct? In many cases, you can check the amounts against your year-end payroll slips from your employer and on personal account statements.
- How much tax have you already paid? The amount of tax that is deducted throughout the year on each source of income may be different from the final result on your tax return. Your assessed tax for the year depends on your level of income and province of residence, with different rates applied for each income bracket at both the provincial and federal level.
Many of your tax slips are available from the My Account portal on the CRA website – but some are not (e.g., the T4A-RCA). If you use tax software that pulls your information directly from the CRA, it may not be complete so it’s important to confirm you have gathered everything.
Step 2: Reduce your taxes with deductions
Your total income can be reduced using tax deductions. Once these are applied, the result is your net taxable income.
Here are a couple of examples:
- Pension contributions. If you are contributing to HOOPP, your HOOPP contributions are tax deductible and will appear on your T4 or T4A slips. Be sure to claim the tax deduction when you file your annual personal tax return.
- Employee’s second Canada Pension Plan (CPP) contributions. Starting in 2024, a tax deduction is available for any additional CPP contributions made on employment income between $68,500 and $73,200. This appears in box 16A of your tax slip (Employee’s second CPP contributions). Note that this is separate from your regular CPP contributions in Box 16, which qualify for a tax credit. Be sure to claim both portions, where applicable.
Step 3: Reduce your taxes with credits
You can further reduce taxes using any tax credits that you are eligible for, based on your personal situation. All Canadian residents can claim the federal basic personal amount, to a maximum of $15,705 in 2024. You may be able to reduce the amount of tax deducted from your pay or pension by using the federal and provincial TD1 (Personal Tax Credits Return) form to reflect the tax credits you plan to claim on your tax return.
Here are some of the credits to consider:
- Pension income tax credit. If you are retired and receiving your pension, this credit can be claimed annually when you file your personal tax return or can be used to reduce the amount of taxes you pay upfront each month.
- Age amount tax credit. If you are age 65 or older and your net income falls below a set level, this tax credit may be available to you.
- Disability tax credit. If you have health conditions that restrict or impair your everyday life, you may qualify for the disability tax credit, which can reduce the amount of income tax that you, or your supporting family member, have to pay. This can be particularly valuable for those with a severe and prolonged impairment.
- Canada caregiver credit. If you support your spouse or other family member with a physical or mental impairment, you may be eligible to claim this credit to help reduce your taxes.
- Medical expenses. You can claim eligible medical expenses that you, your spouse or common-law partner paid for during the tax year.
- Charitable donations. Any donations you make to registered charities are eligible for a tax credit.
Step 4: Retired? Consider tax strategies for your retirement income
There may be ways to structure your retirement income to minimize taxes. Depending on the complexity of your situation, it may be valuable to work with an accountant or other tax professional to find the opportunities available to you.
One example is income splitting for married or common-law couples.
In retirement, couples can split their income from pension plans for tax purposes, which can be particularly beneficial in situations where one spouse has higher income than the other. If you are a HOOPP member, this is available once you start your pension (or from age 65 for any portion of your pension from HOOPP’s Retirement Compensation Arrangement) and must be done on both your year-end tax return and your spouse’s. Pension sharing is also possible for CPP retirement pensions, by contacting Service Canada.
Reminder: CPP and Old Age Security (OAS) benefits are taxable income, but taxes are not automatically deducted, and as a result you may end up owing at the end of the year. You can make a request through Service Canada to have tax deducted directly from your payments.
Step 5: Review your Notice of Assessment
Once your tax return is processed, you’ll get a notice of assessment from the CRA indicating whether you owe additional taxes or qualify for a tax refund. It also provides your registered retirement savings plan (RRSP) deduction limit statement.
Are there any surprises in your assessment? Any actions you should take or lessons to apply for the future? Understanding the basics of your taxes is an important way to build your financial skills and help you make the most of your income over time. It can also help you to decide whether to work with an accountant or other tax professional to get personalized strategies for your situation.
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