How to reduce taxes? [For Canadians]

[quietmalu]

I came across this list of how to reduce your taxes (for the US):
1. Invest in a pre-tax retirement plan like a Traditional 401(k) or Traditional IRA.
2. Buy more groceries with no sales tax and reduce eating out where the sales tax applies.
3. Drive less often and thereby pay less federal and state gas taxes.
4. Buy a smaller home thereby paying less property tax.
5. Buy less stuff and thereby pay less sales tax.
6. Save more money and earn passive income that is not taxed by the FICA tax.
7. Invest in a Roth IRA where the earnings are tax free after 5 years.
8. Go through the car buying process as little as possible to avoid the large one time registration of tags and title (hidden sales tax).
9. Invest in tax efficient index mutual funds outside of retirement to avoid short-term capital gains and instead end up with long-term capital gains that could end up costing 0%.
10. Start a business to tax shelter earned income and deduct expenses doing something you love thereby reducing your taxes in some pretty big ways.

I know that the Canadian equivalent for investment vehicles are RRSP's & TFSA's.  Other than that, can the same be applied to Canadians?  Are there alternatives?

What do you do to reduce your taxes?

[RetiredAt63]

#1 - RESP if children?
#2 works for us too.  Grocery store food has no sales tax.  Snack items bought at a grocery store do.  And of course restaurants are taxed.
#3.  Same, lots of tax.
#4.  Same
#5. Same
#6.  Not sure what the FICA tax is, but most investment incomes are taxed.  Interest =/= dividend =/= capital gains though, figure out which is best for you.
#7.  NA
#8 - registration etc. are not expensive, but there is tax, always, on car purchases, including second-hand.  If you bought privately you will pay it at registration, and if they think the price is too low they will want tax on book value. BTDT

[Guses]

#8 - registration etc. are not expensive, but there is tax, always, on car purchases, including second-hand.  If you bought privately you will pay it at registration, and if they think the price is too low they will want tax on book value. BTDT

Just wanted to add that the obvious conclusion to this is to change car as little as possible.

I personally think that this is borderline fraudulent taxation. You should be able to deduct the sale value of the car and receive a tax rebate when you sell it (as with a trade-in). A car could be taxed at 100% or more if it changes hands privately often enough. Double, triple, quadruple...dipping.

[RetiredAt63]

Excellent point!

#8 - registration etc. are not expensive, but there is tax, always, on car purchases, including second-hand.  If you bought privately you will pay it at registration, and if they think the price is too low they will want tax on book value. BTDT

Just wanted to add that the obvious conclusion to this is to change car as little as possible.

I personally think that this is borderline fraudulent taxation. You should be able to deduct the sale value of the car and receive a tax rebate when you sell it (as with a trade-in). A car could be taxed at 100% or more if it changes hands privately often enough. Double, triple, quadruple...dipping.

[quietmalu]

#6.  ... Interest =/= dividend =/= capital gains though, figure out which is best for you.

I'm a little unclear about #6.  I guess the signs threw me off.  Are you saying that the interest I receive from the bank and/or dividends from my portfolio are all considered capital gains?

Side question:  Do you get any tax benefit if you own a home vs. renting in Canada?

[RetiredAt63]

Sorry, those were supposed to be "not equal" signs.   In other words, each is taxed differently.  Interesting exercise - take a tax form (or software) - enter usual income and deductions.  Add some interest income, see what it does to your tax owing.  Take it out, add the same amount of capital gains.  This is hard to do with dividends unless you actually have some, because they play games with it to account for corporate taxes already paid.  But interesting, because total income on different lines affects credits.

Renting versus owning in Canada, tax-wise.  I think there was something on here at one point. Maybe one of Frugal Toque's guest blogs?  And this is one reason American personal finance books should not be read by Canadians, unless they really know the Canadian situation already.  Capital gains and losses on a principle residence are not part of your income tax - make money, how nice, lose money, too bad.  Secondary residences (i.e. a cottage) are treated like any other investment.  No benefits on the mortgage interest, since it is not for investment purposes.  Unless you take out a new mortgage to buy an investment, then the mortgage loan was for an investment and the interest is an investment deduction.  But if you had to liquidate an investment to do the original mortgage, you will have capital gains to pay tax on (unless you liquidated them because they were losses and good to get out of).

Own versus rent - To me the one thing that can affect us is, that you are paying your mortgage or rent with after-tax dollars.  So say you suddenly have a chunk of money - you can pay off some or all of your mortgage, or invest it.  Most of the discussion here is about the relative yield - mortgage at 4% say, versus an investment at 7%, and they say go for the investment.  But to me (this is my personal opinion, not an expert's) you need to look at that investment income in terms of its after-tax value, at your highest marginal rate (because it will be new income on top of what you already have).  So if you are in Ontario, normally make $100,000 (for simplicity) you are at the marginal tax rate of  26%.  Then in Ontario you are at 11.16%.  So your total tax on $5000 of extra income would be 5000*(.026+.1116) = $1858.  Your original chunk of money was $71428 because 7% of that is $5000.  How much money will you save this year on your mortgage interest if you put this on your mortgage?  And of course the same scenario happens every year.  Then if you cash in that investment, you will possibly have capital gains that will be taxed as well.

So from that logic, having a chunk of money and investing it is going to be the same whether you are renting or owning, your tax implications don't change.  The only thing that changes the situation is putting potential investment money towards your mortgage, which means it is in a very not-liquid asset.  And this is ignoring the fact that when you do come to sell that house, you may end up with a net positive or negative result.

Sorry this was so long, you can see why mortgage versus investment generates whole threads.  But it is a really country-specific and income and tax level specific topic.

#6.  ... Interest =/= dividend =/= capital gains though, figure out which is best for you.

I'm a little unclear about #6.  I guess the signs threw me off.  Are you saying that the interest I receive from the bank and/or dividends from my portfolio are all considered capital gains?

Side question:  Do you get any tax benefit if you own a home vs. renting in Canada?

[HenryDavid]

Couples can file taxes jointly and transfer some deductions.
If one spouse is 60 you can split income. I believe.
Tuition tax credits can transfer to higher earner, eg parents, spouse.
Freelance income gets more deductions than salary--your side gig may involve doing stuff you want to do anyway but if you get paid to do it you can deduct costs until your net side income is zero. Which makes that tax free income.
RSPs are not necessarily for retirement. Think of them as a tax smoothing account. Withdraw in low income years at any time of life and be taxed at lower rates.
Hmm, anyone have more?