Do This to Legally Pay LESS TAXES in Canada

Estimated read time: 1:20

Summary

In "Do This to Legally Pay LESS TAXES in Canada," Twain Ryan Lee debunks common misconceptions about paying taxes in Canada and shares strategies to minimize tax liabilities legally. The video explains the Canadian progressive tax system, emphasizing the value of understanding how marginal tax rates work. It dives into registered accounts like RRSPs and TFSAs, highlighting their tax-saving benefits. Lee also discusses methods for optimizing deductions and credits, and how real estate ownership and side hustles can impact tax obligations. Tips for utilizing a spousal RSP and dealing with rental income are covered, alongside considerations for claiming Capital Cost Allowance (CCA) on rental properties.

Highlights

Marginal tax rates in Canada only apply to each part of your income, not your entire earnings 🎯.
Tax refunds are not free money – they’re your overpaid taxes returned by the government 📬.
Contributing to an RRSP can lower taxable income and increase tax refunds, especially if employers offer matching contributions 💰.
Homeowners can explore specific deductions and deferrals, such as property tax deferrals in certain provinces 🌾.
Freelancers and self-employed individuals can leverage business expenses to lower taxable income, like writing off a portion of a home office 🏡.
Investment and real estate strategies, such as leveraging CCA, require careful calculation to avoid unexpected tax hits in the future 🧮.

Key Takeaways

Understanding Canada’s progressive tax system can save you from paying excessive taxes 🤑.
Using registered accounts like RRSPs can drastically reduce your taxable income while boosting savings 📈.
Smart tax planning involves taking advantage of deductions and credits available, tailored to personal income situations 💡.
Real estate investments come with both lucrative tax benefits and complexities, especially concerning capital gains and CCA recaptures 🏠.
Side hustles should be approached wisely to leverage potential tax savings opportunities, such as business expense deductions 💼.
Keep an eye on strategic spousal income transfers through spousal RSPs or loans to manage family tax liabilities better 👨‍👩‍👧‍👦.

Overview

Twain Ryan Lee's insightful video guides Canadians on how to reduce their tax burdens legally by understanding and exploiting Canada's progressive tax system. He explains the misconceptions around tax brackets and stresses the importance of strategic financial planning.

The video explores valuable tax-saving strategies including the effective use of RRSPs and TFSAs. These registered accounts can significantly lower taxable income and boost savings, especially when combined with employer matching programs. The advantages of real estate investments are also highlighted, emphasizing tax implications.

Lee advises on efficient debt management techniques, such as turning bad debt into tax-deductible debt and how to approach side hustles or additional income. He also delves into the nuances of CCA recaptures and how careful planning can mitigate tax surprises, making tax understanding a crucial tool in financial planning.

Chapters

00:00 - 06:00: Understanding Tax Brackets and Marginal Tax Rates The chapter "Understanding Tax Brackets and Marginal Tax Rates" discusses why many Canadians overpay their taxes each year, and emphasizes that it is legal and possible to avoid overpaying by using the right strategies. Drawing from 12 years of experience as a financial planner, the chapter introduces six key things you need to know to reduce tax payments. The first important concept highlighted is understanding how the government taxes individuals. A common concern is about the impact of a pay raise on one's tax bracket, which could lead to paying more taxes and having less personal money, though this chapter aims to clarify misunderstandings surrounding this issue.
06:00 - 18:00: Registered Accounts and Tax Benefits The chapter begins by addressing a common misconception about the Canadian tax system, which is progressive and based on marginal tax rates. This means that higher income leads to being taxed at a higher rate, but this rate only applies to the portion of income within that specific bracket, not the entire income. For instance, earning $70k in British Columbia places someone in the 28% tax bracket; however, not all of the $70k is taxed at 28%. An analogy of tax brackets being like separate piggy banks helps to illustrate this concept.
18:00 - 26:30: Self-Employment and Related Tax Strategies The chapter discusses tax strategies related to self-employment income. It explains the concept of tax brackets using the metaphor of 'piggy banks.' Each income bracket can be visualized as a piggy bank that gets filled up with portions of your income, and each bank or bracket is taxed at a different rate. The first bracket's income is taxed at 20%, the second at 22%, and the third at 28%. For example, if you earn $70,000, you will be taxed $9,600 based on these brackets.
26:30 - 40:00: Real Estate and Property Tax Benefits The chapter discusses the different income tax brackets and the corresponding amounts, explaining how without deductions or credits, you would pay a total of $15,400 in taxes. It also introduces the concept of tax deductions and tax credits, highlighting the basic personal amount that all Canadians are eligible for as a significant tax credit.
40:00 - 45:00: Advanced Tax Strategies and Considerations This chapter delves into advanced strategies and considerations for optimizing tax payments and understanding refund processes. It explains how tax deductions, like a specific $2,992 tax break, can lower the overall tax liability to $12,400. The discussion clarifies common misconceptions about tax refunds, emphasizing that they are not free money from the government. Instead, the HR department estimates and withholds the needed tax amount from each paycheck throughout the year, which often results in a refund if too much is withheld.

Do This to Legally Pay LESS TAXES in Canada Transcription

00:00 - 00:30 have you ever wondered why you're not getting much tax refunds most Canadians are overpaying their taxes every year but it's 100% legal to avoid it if you just know the right strategies after working 12 years as a financial planner and hundreds of hours of studying on this topic here are the top six things to know in order to pay less taxes number one is how the government taxes you a friend once asked me if you should take a pay raise because he was worried that it will bump him to a higher tax bracket and he'll end up paying more taxes and less money for himself
00:30 - 01:00 this is the biggest misconception people have regarding taxes in Canada we have a progressive tax system with marginal tax rates basically the higher income you earn the higher tax rate will be but the higher tax rate doesn't apply to your entire income let me explain for example if you're earning 70k in BC you'll fall into 28% tax bracket but that doesn't mean your entire 70k is going to be taxed at 28% the way that understand this is Imagine each tax bracket is its own piggy bank and
01:00 - 01:30 as you're earning income you fill up each of the piggy bank one by one until you eventually run out of income to fill up an entire piggy bank now the first piggy bank is going to represent the first tax bracket and all the income you put inside this piggy bank it's going to be taxed at 20% now when it comes to the second bracket you're going to be taxed at 22% and in the third bracket you're going to be taxed at 28% so when you're earning 70k of income you'll be paying 9,600 for the income in
01:30 - 02:00 the first bracket 1,799 for the income in the second bracket and 3,985 for the income in the third bracket so if we add up the total you'll end up paying $15,400 in taxes but this is before we claim any tax deductions or tax credits that we'll be talking about later in this video but the one tax credit that all Canadians are eligible for is the basic personal amount and for 2020
02:00 - 02:30 for this will give us a tax break of $2,992 so you end up with $ 12,400 in taxes but you might be wondering if I'm paying $122,000 in taxes how come I'm still getting a tax refund every year some people think it's free money from the government but that's actually not true the way the tax process works is that for every paycheck that you receive your HR already calculated how much money you're supposed to pay for taxes and then they take that portion away out of your salary
02:30 - 03:00 and prepay that to the government and what happens here is the HR usually takes more than enough so that there there's a little bit more extra just to be safe then in the end when you file your taxes then you realize that you actually pay too much to the government and then you receive that money back in form of a tax refund this is the real reason why people are getting a tax refund and you should know that it's your hard-earned money and not just free money from the government and if you're working multiple jobs then you often run into issue where you start owing taxes instead
03:00 - 03:30 of receiving a tax refund this is because every employer assumes that the employe has the basic personal amount that they haven't claimed yet so when you have two jobs the second employer likely doesn't know that you have another job and so they end up taking less taxes than you're supposed to surprise surprise you end up owing money when you file your taxes and of course if you have other income from Investments or from side hustles then you're likely going to end up owing taxes because
03:30 - 04:00 no taxes were prepaid for any of these income so how can we pay less taxes then well the secret is that you could have 100K of salary but end up with only 70k of taxable income by applying the Tax Strategies that I'm about to share with you it's a lot easier than you think but you do need to be strategic about it and that leads us to the second thing you need to know about is registered accounts these accounts can be used to lower our taxable income so we end up paying less taxes and getting a bigger tax refund and there are several types of these registered accounts first there is
04:00 - 04:30 the work or group RSP as the name suggest this is an account that's offered by your employer so depending on your employer you may or may not have it so be sure to check with yours to see if it's available and a work RSP is where you can put money inside and you can use it to save or invest and the amount you contribute to this account will give you a tax deduction which lowers your taxable income by the same amount so for example if you have 100,000 000 salary and you contribute 10%
04:30 - 05:00 of your income into a group RSP this means that you'll contribute $110,000 in this and because this $10,000 will become a tax deduction for us so our taxable income will actually be lowered from $100,000 to 90,000 and this will end up giving us an extra $2,900 in tax refunds another way to look at this is that the income that we put inside an RSP account is actually not going to be taxed but that's not even the best part the best part is that most employers offer matching when you save
05:00 - 05:30 money into this account meaning for every dollar that you put into this account your employee will also put in $1 now this is free money from your employer so just by putting money in this account you're basically doubling your money without even doing any Investments this is hands down the best account you can use to build up your wealth now a note here though is that because it is an RSP there are some rules you need to follow when it comes to withdrawing money out of it first of
05:30 - 06:00 all you can withdraw your RSP money out anytime you want but any amount you withdraw out from it it will become your taxable income for that year there are two exceptions to this rule number one is you're a firsttime home buyer and you're using the funds to buy your first home in this case you can withdraw up to $60,000 taxfree in the year you purchase your home the second exception is if you go study fulltime and in this case you can withdraw up to $20,000 taxfree but if you withdraw
06:00 - 06:30 your money taxfree under these two conditions you do need to gradually refill that RSP back up over a period of 15 or 10 years respectively another type of register account is the personal RSP this type of account works the same way as your RSP in terms of tax deduction and also the withdrawal rules the only difference is personal rsps are accounts that you can open with any bank or financial institution by yourself and you can have as many RSP account as you want as long as you
06:30 - 07:00 stay within the contribution limit the limit is 18% of your last year's income and for any unused contribution room it will be carried forward indefinitely for your future use the third type of account we could use is the fxsa or first Home Savings Account this account is mainly for people to save money towards their first home and is only available for first-time home buyers now if you're wondering if you're considered a first-time home buyer as long as you did not live in a home that's
07:00 - 07:30 owned by either you or your spouse or common and partner in the previous four calendar years then you're considered a first-time home buyer this also means that if you've purchased a property and have just been renting it out and never lived in it yourself then you are also considered a firsttime home buyer and you're eligible to have this account the FX Justa works the same way as the RSP in terms of giving you a tax deduction but the best part about this is there's no no limit to
07:30 - 08:00 how much you can withdraw out taxfree and there's also no need to refill this account back up after withdrawing another account you should know is the tfsa or the taxfree savings account now it doesn't exactly lower your taxable income so we really consider this as more of an honorable mention but why we should also know about this account is because this account allows us to hold investment inside and grow it tax-free and it's also a much more flexible account compared to the RSP or the f SAA because you can withdraw money out from this account anytime for any purpose taxfree
08:00 - 08:30 we mentioned earlier that if you're doing side hustles then you might end up owing more taxes but there are some tax advantages that you should know about this as well whenever you doing freelance or contract work you are considered to be running a self-employed business in the government's eyes and if you're not sure if you're considered self-employed the easiest way to tell is to see if you receive a T4 for the income that you earned if you didn't receive any tax slips or if you only
08:30 - 09:00 received a t4a then chances are you were doing independent contract work so you're considered self-employed now why it's so important to make this distinction is because there are some tax advantages but there's also some disadvantages to being a self-employed here's the main difference number one is any expense that can potentially help you earn more money in your business you can claim that as a business expense this is why we sometimes hear people say that they're writing
09:00 - 09:30 off their income because they're essentially taking their business expense and claiming it as a tax deduction now these types of expenses can include operating expenses such as advertising meals with clients and office expenses as well as any equipment that you use for example your laptop uh your camera or even software subscriptions and if you need to drive around for the work or to meet clients you can also claim the vehicle expenses including gas maintenance insurance and
09:30 - 10:00 even lease payments for example if you earn a 100K income and you bought $20,000 worth of business expenses then your taxable income will become $80,000 the second difference is home office expenses employees can claim home office expenses as well as long as they have assigned 2200 form by their employer but the list of eligible expenses are much more limited compared to someone who's
10:00 - 10:30 self-employed the biggest difference is as a self- employer you can clean mortgage interest property taxes home insurance whereas employees can't these are significant costs for a homeowner and just by being self-employed and working from home you can clean a portion of those expenses to write off your income the third difference is EI premiums for employees EI premiums are about $1,000 a year but for self-employed EI becomes optional so you could potentially save $1,000
10:30 - 11:00 but of course that means giving up the maternity or the sickness benefits and the fourth difference is CPP as an employee you pay 5.95% of your income as a CPP and your employer will pay another 5.95% to the government for you but as a self-employed you're basically considered as your own employer so this means that you're actually paying double the amount so you're paying 11.9% of CPP instead next is tax deductions and credit credits there are countless deductions and credits available
11:00 - 11:30 but here are the most commonly used ones first is the child care expense deduction and this is for families where both spouses are working and they need to send their kid to a daycare the lower income spouse gets to claim up to $88,000 of deduction for the expenses paid for any children under age 7 or up to $5,000 if their kid is between 7 to 16 years old the second deduction is when you can turn your bad debt into good debts which means that you're turning your interest
11:30 - 12:00 that's normally not tax deductible into something that can become tax deductible this usually requires more advanced planning or strategies like Leverage investing and is normally used by higher income earners for example if someone has a $10,000 debt and they have a $10,000 investment what he can do is he can sell this investment and use the money to pay off this debt then he can use a personal line credit or a home equity line of credit and take out 10,000 to put it back into his
12:00 - 12:30 Investments by doing this he still has $110,000 of investment and he still owes $110,000 but now instead of the original debt he now owes $110,000 to a personal line of credit or a home equity line of credit but now the difference is the interest expense that he needs to pay is now tax deductible because he effectively borrowed money to invest and so he can claim a tax deduction under carrying charges on line 22100 I do want to point out though that this strategy is not for everyone
12:30 - 13:00 because there is a number of factors that you need to consider such as tax implications investment returns time Horizon also the risk tolerance and interest rates some people further extend this to something called A Smith maneuver in order to make their mortgage payments become tax deductible as well next is the medical expense tax credit now we can only clean medical expenses if the total exceeds 3% of our net income now for people with spouses you can claim all the mental expense under
13:00 - 13:30 1% so this way it's easier to exceed that 3% of income most people just add up all the expenses they have from January 1st to December 31st but you don't have to use this period the government actually allows us to use any 12-month period that's ending in the same tax year so for example in your 2024 tax return you could claim medical expenses from February 2023 to February
13:30 - 14:00 2024 as long as you haven't claimed the expenses in the previous year's tax return when this might be useful is when there's a year where you had a lot of medical expenses but not a lot of income in that year in that case instead of wasting the medical expense and not getting any tax savings you can save it up for the next year to see if you can get a bigger tax return another one is the donations tax credit for donations you can also combine both spouse's donations and
14:00 - 14:30 claim it under one person and this is beneficial because you actually get more tax savings when your donation amount total is over $200 so if your total donation amount is less than2 200 in a year then you might want to consider saving it and claiming it in a future year so that you add up to a total that's over $200 aside from using the deductions and tax credits there's also other ways that you can split income to your spouse or other family members for example you could
14:30 - 15:00 use the child care expense deduction that we mentioned earlier and use that to split income to your other family members for example you can consider asking the grandparents to help babysit and this way you can pay them a childcare fee then claim it as a tax deduction on the other hand the family member who's helping you babysit will need to report that as part of their income and this type of income would be considered a self-employed income as well so you could also make use of the business expenses that we mentioned earlier and depending on their income they might also qualify
15:00 - 15:30 for the Canada workers benefit that's going to be an additional $1,400 in tax refunds the second way to split income is by using a spousal RSP account this type of RSP account is for families where one spouse is earning significantly higher income than the other spouse so what happens here is the higher income spouse will use their own contribution room and they would actually contribute and into a spousal RSP account that's basically owned by this lower income
15:30 - 16:00 spouse now when you do it this way the higher income spouse gets to use the tax deduction so it can save a lot more taxes while the money is going to stay inside an account that's under The spouse's name so this way it will help you with future withdrawals because the future withdrawals will also become taxable income but instead of it being under the higher income spouse's name now the RSP income is going to be part of of the lower income spouse so in the end you actually
16:00 - 16:30 reduce a lot more taxes for the family the third income strategy is something called the spousal loan this is a more Advanced Tax strategy that's more for higher income families and this is where the higher income spouse would basically loan the money to the lower income spouse and there will be some interest rate at the CRA prescribed rates then your spouse would then take the funds and use it to invest similar to the spousal RSP by doing it this way all the future investment income will
16:30 - 17:00 be taxed under the lower income spouse's name now with this strategy the government is quite strict so you do you need to make sure the lower income spouse actually pays the annual interest to the higher income spouse otherwise if you forget to do that in that year then the income earned from the investments will then be attributed back to the higher income spouse so instead of it being taxed at a lower rate now it's going to go back to being taxed at a higher rate as for the higher income spouse they do need to report the annual interest as taxable income as well if you're
17:00 - 17:30 considering this strategy you should consider working with a tax lawyer and also be mindful that there's going to be ongoing costs such as legal fees or accounting fees to maintain the spousal loan this strategy is not as attractive as it used to be because it used to be 1 to 2% prescribed rate but now it's actually at 6% but it's still worth considering if you can expect to get a higher investment return compared to the Pres subcribe rate also interest rates have begun
17:30 - 18:00 dropping as well so you might want to keep this in mind if you're in the position to take advantage of this now when it comes to real estate a lot of people like to own multiple properties and there's actually a good reason why it's because there are many tax benefits When you own a real estate for one when you own a property and you live in it yourself you do qualify for the principal residence exemption which basically means the home that you live in is going to be taxfree when you sell it in the future with our home being the big biggest asset that we likely will have having it
18:00 - 18:30 taxfree will make a huge impact to your overall wealth also when it comes to paying property taxes with your principal residents there are some provinces like BC or Ontario that offer government programs that let you defer your property taxes so people who are eligible can actually stop paying their property taxes and pay it later with a low annual interest rate you can defer the taxes until you eventually sell the property or when you do a refinance on the property different provinces have
18:30 - 19:00 different criteria but in BC if you have a child that's under 18 years old or if you're 55 years old then you qualify for this program the idea is that you can free up the cash flow so instead of using that money to pay the government you can now use the money for multiple things right you can either use it to uh pay for living expenses or you can use it to build up your investment savings or you can contribute into your RSP for additional tax savings or if you have a child you can use the money to contribute into Rees to get the 20% Grant or you can use it to enhance your
19:00 - 19:30 estate plan by using the money to buy and life insurance policy and the tax benefits don't just stop at the principal residence when you own a property and you're renting it out we're able to generate rental income and usually the rental income is going to be taxable now that doesn't sound too good right well yes but not really the reason is because you can actually use rental expenses to offset the the rental income that you make so for example if you own a property
19:30 - 20:00 and you're renting it out for 2,500 a month this means in a year you'll earn $30,000 in total and imagine if you have a full-time job and you add another 30k on top that's going to be a lot of taxes but according to the 50-page publication by the CRA a lot of things can be claimed as a rental expense to write off your rental income for example you can write off your operating expenses home insurance property taxes rep pairs mortgage interest and even depreciation and because of
20:00 - 20:30 this now it becomes a lot more attractive let's say your rental expenses cost about 20% of the rental income that you make so in our example with 30k of rental income your expense is going to be 6K then you can also deduct the mortgage interest but keep in mind you need to separate out the mortgage payment to see which part is the interest and which part is the principal because we can only deduct the interest portion of the mortgage pay payments and let's say the mortgage interest comes out to 20,000 in a year so that means we can take away 6,000 and another
20:30 - 21:00 20,000 out from our 30k rental income so in the end we'll only have $4,000 of taxable rental income but that's not even all you can also claim depreciation on your Furnitures or appliances and even the rental property itself and when you claim depreciation you can actually choose how much you want to to depreciate by for example if your rental expenses already reduces your rental
21:00 - 21:30 income to zero then there's probably no point for you to use additional depreciation in that case you can actually choose to not depreciate your property on paper and save it for future years and you can use that to reduce your income down the road however there are a few nuances to this especially when it comes to depreciating the rental property itself while claiming depreciation does give you a lot of tax savings every year it might also bump up your taxable income by a huge
21:30 - 22:00 amount in the year that you sell your property this is because there's something called a CCA recapture and this happens when you sell an asset for more than it's undepreciated Capital cost which is the remaining value of the asset on paper after depreciation so for example let's say you purchased property for $600,000 and you sold the property 5 years later for $7 ,000 then you would have a capital gain of $100,000 and since the inclusion rate for capital gains is 50% that
22:00 - 22:30 means we would take 100K of capital gain times 50% that will give us the taxable capital gain amount of 50k and this will be the amount that's going to be added onto our taxable income but let's compare what happens if you chose to claim CCA or depreciation on your rental property let's say you claimed 100K on depreciation for your property then the undepreciated capital cost would be
22:30 - 23:00 600k minus 100K so it would equal 500k remember we sold the property for 700k right so when the UCC amount is less than how much you sold it for then this is where a CCA recapture happens and that means the difference between 700k to 500k this $200,000 difference is going to be added onto your taxable income and the worst part is this will be considered income and not cash capital gains so it means you would need to add 200k of taxable income for that year now this might sound horrible so you
23:00 - 23:30 might be wondering how come people still choose to claim CCA then well there's definitely a lot of people who claim CCA because they just don't know the full consequence of claiming depreciation on the rental property all they're focusing on is probably the potential tax savings that they were going to get every single year but this doesn't mean that the strategy is all that bad it just requires proper calculations and planning to make sure that it's worthwhile because sometimes saving
23:30 - 24:00 a chunk of taxes every year and using those tax savings to invest may actually get you a lot more ahead even if it means you need to pay a bigger chunk of taxes later on down the road generally speaking the longer you plan to hold on to your property before selling the more attractive claiming CCA will be because you would have more time to invest your tax savings and try to get ahead before the CCA recapture happens another consideration is that claiming CCA actually
24:00 - 24:30 takes away your ability to use the change of use elections for different capital gains a lot of people don't know this but if you ever decide to move back into your rental property it is considered a change of use and in the C's eyes they would consider to have sold the property on the day that you moved back in and repurchase the property on the same day now that might not sound like much but what it means is when this happens the GI would be expecting you to pay a capital
24:30 - 25:00 gains tax on any appreciation that has happened for your property when you haven't even sold the property yet you simply just move back into a property that you've been renting out and you will be charged capital gains tax the way around this is to make a change of use election but the danger of claiming CCA on your rental property is that it disqualifies you from making such elections so to summarize the decision to claim CCA does require thorough tax planning because it depends on how long you plan to hold the property what's your risk tolerance what's the investment
25:00 - 25:30 returns that you're expecting and that leads me to the last thing that you need to know and that is you might just be focusing on the wrong thing all these Advanced strategies won't matter if you're not even getting your fundamentals right and you keep making silly mistakes with your money without even realizing click here to learn the number one tfsa mistake Canadians are making uh