Dale Jackson

Personal Finance Columnist, Payback Time

Follow|Archive

Our historically low unemployment rate of 4.9 per cent suggests many of us are working harder and, with labour in short supply, making more than usual.

Making more money is a good thing; especially for the Canada Revenue Agency (CRA), which takes a bigger cut as our income rises. There are ways, however, to keep more of those hard-earned dollars away from the taxman and in your own pocket.

We don’t usually think about income tax until the year is over and we’re staring down the barrel of a filing deadline. But with 2022 well past the halfway point, the fiscal year’s tax picture should be coming into view and early steps can be taken to find shelters to lower our tax bills and plan for the future. 

• Sign up for BNN Bloomberg's personal finance newsletter, Home Economics

In most cases, employers deduct an estimated amount of income tax directly from our paycheques. For others, especially those with more than one source of income, the tax bill could come as a shock. Either way, it’s your money — for now.

HOW THE INCOME TAX SYSTEM WORKS

The amount of income tax Canadians pay is based on marginal tax rates that rise as income increases. In 2022, $14,400 of income under $155,625 is exempt from taxation, but that basic exemption decreases as income increases. In other words, it’s better to make less in tax terms.

Federal tax rates are the same for all Canadians, but Ottawa also collects provincial and territorial income tax on their behalf (except for Quebec), and combined rates can vary across the country.

In Ontario, for example, the first $46,226 of income is taxed at a bit more than 20 per cent. Income between $46,226 and $50,197 is taxed at 24.15 per cent, and income between $50,197 and $81,411 is taxed at 29.65 per cent.

Marginal tax rates can exceed 50 per cent in the $200,000 zone. When you do the arithmetic, it’s not hard to see how lowering your income to a lower marginal tax rate can save big bucks.

HOW TO KEEP MORE OF YOUR MONEY IN YOUR POCKET

There are many tax-saving strategies depending on your personal situation, so it’s best to speak with a tax professional. For average Canadians, there are four basic ways to reduce taxable income.

1. Deductions and credits: Many day-to-day expenses accumulated throughout the year can be deducted dollar-for-dollar from taxable income. Others are eligible for tax-saving credits that recover a portion of the expense. Many of the costs of doing business for the self-employed are deductible, while credits are available for some expenses relating to health and child care.

Be sure to keep documentation to back-up your claims. 

2. Registered retirement savings plan: The best way for most Canadians to lower their taxable income in the present and save for retirement is by contributing to an RRSP. The contribution amount can be deducted directly from your income and invested in just about anything. 

3. Spousal RRSP: The biggest drawback to an RRSP is that it will be fully taxed when it is withdrawn; ideally in retirement when your income is at a lower marginal rate.

One way to avoid accumulating too much in your RRSP over the years and falling into a tax trap in retirement is by splitting your income with a lower-income spouse.

A spousal RRSP allows you to contribute to your spouse’s RRSP and deduct the amount from your taxable income. There are limits on how much you can contribute to either RRSP, so you might want to keep some of that contribution space for future years when you are pulling in the big bucks.

4. Choose wisely when you work OT: Most provincial labour laws require employers to pay time-and-half for hourly workers who work extra hours. But they also require them to offer time off in lieu (one and a half hours for every hour of overtime) as an alternative.

If you choose the money, your taxable income will increase — perhaps to a higher marginal rate.

If you choose time-in-lieu, the government has not devised a way to tax time — at least not yet.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.