Reducing your taxable income through tax saving

Canada, 13th September: Making wise financial decisions can help you reduce your taxable income once you retire.

Canada, 13th September: Making wise financial decisions can help you reduce your taxable income once you retire.

Let us see what to do to reduce one’s taxable as well as net income in order to reduce income tax payments—

A.) Splitting income with your spouse—You can certainly bring down your income taxes, taxable income and net income if you take care to split your income with your spouse.

Of course, there are lots of advantages of doing so—

• It creates a pension tax credit for your spouse;

• Helps in elimination or reduction of OAS clawback.

• Reduces marginal tax rate of the taxpayer.

In case, both spouses happen to be in the same tax limit, then pension splitting is a better option than income splitting for reducing marginal tax rate.

B.) Share CPP retirement pension with spouse—You can save your taxes if both of you have attained the age of 60 years. Also, either of the spouse must be a recipient of a CPP retirement pension. Another requirement is both of the partners must have been living together when contributions to CPP were made by either of the two.

Both partners are entitled to equal proportion of the CPP retirement pensions earned during the time when both were staying together. This is a best option where one spouse falls in the higher tax bracket.

C.) Invest all income of lower-income spouse—Another good way to cut back your taxes is to invest the whole income of the spouse earning lower income in case both are earning.

D.) Lending money to your spouse—Lending money by a spouse in higher tax bracket to the other in a lower-tax bracket can help in saving your income tax.

Apart from a spouse, you can also lend money to your child. The amount loaned to your child or your spouse can be used for purchasing investments. The spouse in the lower-income bracket will pay the tax on investment income.

However, make sure to write a promissory note for the money lent to your spouse or your child along with specifications of the rate of interest as well as principal amount.

The rate of interest needs to be higher than or at least same as the rate of interests set by CRA (Canada Revenue Agency) when the money is lent. It may be mentioned that the CRA revises rates after each quarter.