When it comes to saving money on your taxes, there are some simple tips and tricks that everyone can follow to maximize their tax refund or savings.
We’ve collected the best ways Canadians can reduce their income tax burden. Of course, not all of these will apply to you. If you’re not sure whether you can take a certain deduction, it may be a good idea to consult a tax accountant instead of using software to prepare your taxes.
Key Takeaways
- Reduce your taxable income by contributing to an RRSP, TFSA, RESP, or HSA.
- Income splitting can help you and your spouse lighten your tax burden.
- Charitable donations, tax credits, and deductions can all lower your taxes.
- The Smith Maneuver can help you deduct interest paid on your HELOC.
- Using the right tax prep software or hiring an expert can help you maximize deductions.
1. Max out contributions to a tax-deferred savings or pension
One of the main ways you can plan ahead to reduce your taxes is to take advantage of tax-deferred accounts. These include:
- Registered Retirement Savings Plans (RRSPs)
- Tax-Free Savings Accounts (TFSAs)
- First Home Savings Account (FHSA)
- Registered Education Savings Plans (RESPs)
- Healthcare Savings Accounts (HSAs)
- Pension contributions with a pre-tax option
Each of these accounts works a little differently.
Use a Registered Retirement Savings Plan (RRSP) to reduce your taxable income
A Registered Retirement Savings Plan (RRSP) is a type of investment or savings account available to Canadians that allows for the deferral of taxes.
RRSP contributions are deductible for tax purposes, which means you can deduct the contributions from your earned income in any given contribution year. That means you’ll only be taxed on the income left over after your contribution.
How much can you contribute? You can contribute up to 18% of your earned income. In 2024, the annual contribution limit was $31,560.
When should you do this? In general, it's only advantageous to contribute to an RRSP if you currently pay more in taxes than you expect to pay when you withdraw money from the account. This is the case for most people as they usually make their withdrawals upon retirement when their income is lower (which means a lower marginal tax rate).
Bonus tax benefit: RRSPs are taxed when you withdraw the money—you don’t have to pay taxes now, even on interest the account earns. You can use this to your advantage by strategically timing your withdrawals in a year when you don’t bring in much income, so you’ll be taxed at a lower rate.
In a no income year, you can make withdrawals up to the Basic Personal Amount, without paying any taxes at all.
Need to know: When you turn 71, you’ll need to convert your RRSP into an RRIF. You’ll still only be taxed on the money you withdraw, but you’ll be required to pull out a certain percentage of your savings each year.
Put your savings in a Tax-Free Savings Account (TFSA)
The Tax Free Savings Account (TFSA) is a savings or investment account designed to encourage Canadians 18 and older to invest and save for their retirement.
Because it’s assumed you’re using after-tax dollars to contribute to the account, the income earned in these accounts (like interest and capital gains) is completely free of taxes, and you won’t pay taxes when you withdraw money from the account.
How much can you contribute? The annual contribution for TFSAs is $7,000 in 2024. However, that limit rolls over each year, so if you haven’t maxed out your contributions every year, your TFSA contribution room will be higher. You can find out how much contribution room you have by visiting your CRA My Account page.
When should you do this? TFSAs are great to contribute to when you’re young and not earning much income, and withdraw from in higher-income years. You could even withdraw from your TFSA in a super high income year and use the money to contribute to your RRSP to effectively lower your income for that year and save on taxes.
You can keep your TFSA if you leave Canada. If you ever move and become a non-resident of Canada, you still get to keep your TFSA and don’t have to pay taxes on any withdrawals. In this case it’s important to note that as a non-resident you wouldn’t create any new contribution room in the future.
Did you know? You don’t need cash to contribute to a TFSA. You can also contribute equities from other investment accounts, like your RRSP. Also, you and your spouse can both contribute to each other’s TFSA tax-free.
Decrease taxable income by using an FHSA to save for a home
If you’re thinking of buying your first home, a First Home Savings Account (FHSA) can be a great way to set aside savings and reduce your tax burden.
What are FHSAs? FHSAs are similar to RRSPs—the money you contribute is deducted from your earned income, so you only pay taxes on the income left over after your contribution. And you won’t have to pay taxes on money that you withdraw from your FHSA to buy your first home.
How much can I contribute? You can contribute up to $8,000 a year to your FHSA, and there’s a lifetime limit of $40,000.
Contribute to an RESP to reduce taxes and save for college
The RESP (Registered Education Savings Plan) is available to Canadians to help pay for a child’s future post-secondary education costs.
How does it affect taxes? Contributions to an RESP are not tax deductible, and you don’t have to pay taxes on the contributions since they’re made with after-tax dollars. When the funds are withdrawn to pay tuition (Educational Assistance Payments), the beneficiary will have to pay taxes on any earnings – but since an RESP is intended to be used by a student, the thinking is that they won’t be bringing in much income, so they should be taxed at a lower rate.
Important tax note: If the beneficiary doesn’t go to post-secondary school, the contributor will have to pay taxes on the earnings at their marginal rate plus an additional tax of 20%. This is designed to discourage people from fraudulently using the program, and it can sometimes result in a high tax bill.
Who can contribute to an RESP? Any relative can open one for a child and there's a lifetime contribution limit of $50,000 per child.
RESPs can earn you money. If you have an RESP, you’ll be eligible for a federal Canada Education Savings Grant (CESG). This grant works out to 20% (first $2,500) of the total RESP contributions made each year, and is intended to help pay for tuition costs. The annual limit is $500 and the lifetime limit is $7,200. Additional CESGs may be available based on your family’s income.
Contribute to a Health Savings Account (HSA)
In Canada, you don’t pay taxes on contributions to a Health Savings Account (HSA), and you won’t pay taxes on the money you withdraw. This makes it an extremely tax-friendly way to save for future medical expenses that aren’t covered by your healthcare plan, including prescriptions.
Invest in pre-tax pension options
If your employer has a pension program with a pre-tax contribution option, investing in that can lower your taxable income for the year. Your pension contributions will be deducted from your gross pay, so you’ll only be taxed on the remainder after your contribution – just like contributions to an RRSP.
Bonus: If your employer offers pension matching, they’ll contribute the same amount to your pension as your contributions (up to a certain amount). This can help your retirement savings grow up to twice as fast!
2. Split your income or pension with your spouse
Income splitting involves allocating income from one spouse or common-law partner (the higher income earner) to the other (the lower income earner).
Since the marginal tax rate of the higher earner is higher, moving the income to the lower income earner means that amount can be taxed at a lower rate.
How to income split before retirement: If you and your spouse or partner are under 65, you have limited options for income splitting, like transferring part of the higher-earner’s income into the lower-earner’s RRSP. When the lower earner withdraws the funds (as long as they’ve been in the RRSP for at least 3 years), they’ll be taxed at the lower earner’s marginal tax rate.
How to income split after retirement: If you and your spouse or partner are in different tax brackets, the higher earner can transfer part of their pension to the other one to take advantage of their lower tax rate. Note that some pensions, like the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) are not eligible for income splitting.
3. Make a charitable donation
Ask for a receipt for any donations you make to a registered charity. You can usually claim the amount that’s listed on the donation receipt (the fair-market value of the gift) for a non-refundable tax credit.
You may be eligible for provincial tax credits as well: Each province has charitable donation tax credits that stack with the federal ones.
Want to maximize your charitable donations even more? Buy items that come with a bonus, like a buy one get one free sale. Donate one of the items to charity (be sure to get a receipt). Then, you can keep the extra item, get a tax credit for your donation, and help a cause you believe in – all at the same time.
4. Take advantage of tax credits and deductions
Canada has a ton of tax credits and deductions available, so take the time to ensure you’re taking advantage of all of the ones that apply to you.
Popular tax credits and deductions include:
- Canada Workers Benefit (CWB): If your household income is below a certain threshold, you can claim the CWB as a refundable tax credit to decrease your family’s tax burden.
- Medical expenses: A non-refundable tax credit is available for eligible medical expenses paid by the taxpayer, their spouse, common law partner or dependents. All eligible medical expenses can be claimed even if they were paid outside of Canada.
- Moving expenses: You can claim eligible moving expenses if you moved over 40km closer to where your new work is located and you are a factual or deemed resident of Canada. Students can also claim moving expenses if they're moving to attend post-secondary school on a full-time basis.
- Student loan interest: Students that have taken out an approved student loan are eligible to deduct all interest paid on that loan as a non-refundable tax credit. The student is eligible to claim the amount even if the loan is paid by a relative, and the credit can be deferred for up to 5 years if needed.
- Disability tax credit: The disability tax credit is designed to help those who suffer from a severe or prolonged impairment in physical or mental function. You must obtain approval from a doctor or certified practitioner in order to become eligible.
- First-Time Home Buyer tax credit: If you or your spouse purchased your first home last year, you may be eligible to claim up to $10,000 of the cost of buying your home.
- Tuition tax credit: If you’re a post-secondary student, you can claim tuition-related extensions for a tax credit. Eligible expenses include admission costs, fees for using the campus library or computers, seminar fees, and more.
- Canada Training Credit (CTC): Earn an additional tax credit of $250 a year for each year you’re enrolled in post-secondary school, up to a lifetime maximum of $5,000.
If you’re a parent or caregiver, you may also be eligible for these tax credits:
- Child care credit: You can claim up to 2/3 of your earned income on child care expenses for minor children who live with you. These expenses should be listed on Form T778.
- Canada Caregiver Credit (CCC): The Canada Caregiver Credit (CCC) applies to anyone who maintained their own home and provided care for a parent, grandparent, or other eligible dependent. This credit is designed to help people who are looking after a loved one who has a relatively low income.
- Canada Child Benefit (CCB): The Canada Child Benefit is a tax-free payment made monthly to parents to help offset the costs of raising a child. For 2024–2025, the CCB credit is $7,787 a year for children under 6 and $6,570 a year for children 6–17, paid monthly.
- Home accessibility tax credit (HATC): Claim this tax credit if you’ve made renovations to your home to make it more accessible for an eligible disabled person who lives with you.
- Multigenerational Home Renovation Tax Credit (MHRTC): You may be eligible for this tax credit if you’ve recently renovated your home so it can accommodate more family members.
5. Try the Smith Maneuver
The Smith Maneuver is a basic strategy that allows Canadians to deduct the interest on their mortgage. It follows the same principles discussed in the last strategy, except it involves the mortgage on your principal residence (home).
How do you do this? The strategy is simple: obtain a readvanceable mortgage consisting of both your regular mortgage and a HELOC (home equity line of credit). As you make your regular mortgage payments, the credit available in the HELOC portion increases. Borrow against this, then use that money to invest in assets that generate income (usually dividend-paying stocks).
How does this help your taxes? When you complete your tax return, the interest paid on the HELOC is then deducted against the investment income earned.
Use this strategy with caution: The large majority of people are better off to focus on their RRSP and TFSA accounts rather than borrow money to invest simply because there's too much risk involved. If you're considering this strategy, you’ll want to make sure you have a long term financial plan to pay back the borrowed money.
6. Be smart about how you prepare your taxes
If you prepare your taxes yourself, there’s a chance that you’ll miss out on deductions and credits that could save you money on your tax bill. It’s important to use reliable tax software or consult an accountant for personalized advice on your tax situation.
If you’re looking for a good tax software, check out our reviews of the best free tax software in Canada!
Disclaimer
We’ve made every effort to make sure the information found here is accurate and up to date.
Please consult with an accountant, use Canadian tax software, or refer to the Canadian Revenue Agency website before making any important financial decisions and to get the most up-to-date tax information.
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$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.FAQ
How can I save money on taxes?
The best way to save money on your taxes is to take advantage of all of the credits and deductions that are available to you. Decreasing your taxable income by investing in an RRSP or TFSA can also be useful.
What is the best tax software?
There are a lot of tax softwares out there that are reliable and useful, but we especially like Wealthsimple Tax because it’s free and easy to use.
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