3 ways I discovered how to reduce my taxes
3 ways I discovered how to reduce my taxes
I remember a few years ago I read this article online that I now cannot find. It was basically an explanation on how the rich pay much less in taxes as a percentage of their income. I didn’t think too much about trying to reduce my taxes at the time because I had recently graduated university, and was starting my new career in another province. I had too much to worry about before I could worry about trying to reduce my taxes…like getting enough income to start paying taxes. I thought that would be the best place to start! But I think it really stuck with me subconsciously because over the next few years I started to think of multiple “hustles” to help reduce my taxes as I felt this could be another avenue for retaining more money.
It really started a few years ago when I was toying around with the idea of starting a travel blog. In my mind a travel blog would be the ultimate secondary source of income as long as you could get it to the income producing status. Think about how good it would be to have all of your trips be expenses for your business. This would reduce your taxable income to a lower level in your first few years as you probably wouldn’t turn a profit immediately and then you’d end up with all of your trips being paid for through your blogging income. Ideal isn’t it? I even took this idea as far as talking to an auditor for the Canadian Revenue Agency and while they didn’t say specifics about whether or not it would be possible, they did say as long as you could prove it was a business with a possibility of making money then it would have a much better chance.
Now obviously that idea didn’t really take off for me. I did write some travel articles which you can check out here if you want. But to follow up on getting more information to possibly reduce my taxes I ended up ordering this riveting book 101 Tax Secrets for Canadians. It’s not quite as enthralling as something like A Song of Ice and Fire but it’s pretty handy for anyone who has a small business and families filing their own taxes to ensure they don’t miss anything.
Small businesses you say?
Yes, I did say small businesses which would include my income properties. You may have figured out by now since you read about the tax benefits of income properties that I was able to benefit from these properties in more than just my income. I currently have 3 units I rent out and to properly do this I incur many different expenses. I won’t get into the details but I will tell you this; I paid 15% in taxes on my gross income this year. Just two years ago before I had these income properties I paid 22%.
That’s a 7% decrease as a percentage of my gross. Now you may be wondering if I earned less. I actually earned less on my employment income by about 7% due to my schedule changing and less overtime. On the other hand, my rental income increased by 57% and my taxable investment income by just under 14%. Overall my total income for 2015 increased 2% over my previous year’s total.
So how did I reduce my income tax?
There’s a few major contributing factors that helped to reduce my income tax:
- RRSP Contributions – I made a much larger contribution to my RRSPs this year. This was the biggest factor in reducing my employment taxable income. I’m near the top of the tax brackets for both federal and provincial taxes. I don’t really see my employment income climbing drastically enough that saving this contribution room will benefit me much more in the future.
- Income property deductions – I recently posted an article on 9 Great Tax Deductions for Income Properties that you should definitely check out. (In fact you can just click that text and you’ll be reading it before you know it!) This past year one of my units was running at a loss due to some minor renovations which are considered current expenses. This offset the gains by my other property and therefore my taxable income this year on the properties was $0.
- Tax Free Savings Account – My Tax Free Savings Account actually didn’t make any money in the calendar year of 2015. It actually lost $6078.22 due to the poor performance of the markets and the Canadian dollar. But any gains in this would have been tax free. For my calculations the loss was not considered for my gross income.
There’s the 3 main ways I’ve been able to reduce my taxes paid on my gross income. This year I’ll be trying to increase my gross income and hopefully maintain or lower my taxes. What percentage of your gross income is going to taxes? Do you have more ways to reduce taxes that you’d like to share? Let everyone know in the comments below!