A common refrain among single Canadians is that most tax breaks seem to favour couples. After all, Canadian couples can take advantage of several tax benefits that aren’t available to single people. These include jointly claiming tax-deductible expenses, (such as medical expenses), splitting tax credits for donations, income splitting and contributing to spousal RRSPs.
However, there are still plenty of legitimate strategies for single Canadians to reduce their tax bill. These tax saving tips outline some of the most effective ways.
Make the most of tax-free and tax-sheltered accounts
Probably the most important tax saving tip for single Canadian taxpayers is to maximize your use of registered accounts, which come with considerable tax savings.
The Registered Retirement Savings Plan (RRSP) is an extremely useful tool for both retirement planning and tax planning. Each dollar contributed to your RRSP (within your limit) directly reduces your taxable income for the corresponding year. If you’re in a high tax bracket, this could mean a considerable tax refund. RRSPs are especially helpful because they help you save faster for retirement, with those savings growing tax-free until you withdraw them (when you'll likely be in a lower income bracket).
While Tax-Free Savings Account (TFSA) contributions aren't tax deductible, any growth in the account and withdrawals are completely tax-free. The TFSA is extremely flexible, allowing access to your funds at any time, for any reason, without causing a spike in your taxable income.
Use the First Home Savings Account (FHSA) to buy your first home
If you’re saving for a down payment on your first home, this tax saving tip is a must: open an FHSA to help speed up your down payment savings. It brings together key advantages of both the RRSP and the TFSA: contributions are tax-deductible (which immediately lowers your annual taxes), your savings grow completely tax-free, and withdrawals used to buy your first home are tax-free.
You can contribute up to $8,000 annually and $40,000 in total, which can help get you into your first home faster and in an extremely tax-efficient way.
Use tax-loss selling in your investment portfolio
This tax saving tip is for Canadians who own taxable investments (those that are held in non-registered accounts). Tax-loss selling can be an effective technique to reduce your income tax; you can use these losses to offset current-year capital gains or those in future years.
For solo investors, using tax-loss selling can help ensure you don't overpay tax on more profitable investments. It’s important, however, to avoid triggering the "superficial loss" rule. This rule will deny the loss if the same investment is repurchased within 30 days before or after the sale.
Reduce your tax bill with charitable donations
Charitable giving is not only fulfilling, it also provides tax breaks. Canadian taxpayers are entitled to a non-refundable tax credit for donations made to registered charities. While you can't combine your donations with a spouse, you can take advantage of the higher credit rate applied to donations over $200.
A more advanced approach is to donate investments that have increased in value. When you give these to a registered charity, you don’t pay capital gains tax on the money you give. You do, however, get a receipt for the full market value of your donation. This dual benefit makes it a particularly efficient tax strategy for singles with investments that have grown in value.
If you run a business, consider dividend income
This tax saving tip is for incorporated business owners, who have flexibility in how they pay themselves. While a salary is standard, issuing yourself dividends can offer certain tax savings, because dividends are taxed at a lower rate, coming out of after-tax corporate profits.
There are some down sides to this strategy, however; dividend income doesn’t increase your RRSP contribution room and doesn't factor into Canada Pension Plan (CPP) contributions. Still, many single entrepreneurs benefit from the immediate tax savings, which can improve cash flow for business or personal use.
Deduct eligible business expenses if you're self-employed
This tax saving tip is for freelancers and sole proprietors; deducting business expenses is a critical way to reduce your taxable income. Any reasonable expense incurred to earn business income can be deducted; this includes some of your home office costs, professional fees, office supplies, vehicle expenses and travel.
By carefully tracking these, you can substantially reduce your net taxable business income.
Claim the Home Buyers' Amount when you buy a home
Another tax saving tip for people looking to buy their first home: remember to claim the Home Buyers’ Amount, a tax credit available when you buy your first qualifying home. There is a $10,000 set amount used to calculate the credit, which results in a maximum non‑refundable credit of $1,500. This can reduce your income tax, providing some relief with the upfront costs of home ownership.
Take advantage of tax deferral on capital gains
With non-registered investments, you only pay taxes on capital gains when you sell those investments. This lets you use tax deferral to your advantage. By holding investments long-term, your money can grow uninterrupted, without taxes.
This allows you to time the realization of those gains to years when your other income is lower, helping you pay less tax overall.
Claim moving expenses when relocating for employment or education
One valuable, often overlooked, tax saving tip is to submit deductions for moving expenses. If you relocated to attend post-secondary education, take a new job, start a new business, or work at a new branch with your current employer, you may be able to claim eligible moving costs.
The key requirement is that your new home must be at least 40 kilometres closer to your work location or school than your previous residence. You can deduct:
- Transportation and storage costs (including packing).
- Temporary living/lodging expenses.
- Lease cancellation expenses.
- Home sale and new home purchase costs.
- Costs to maintain your old home (up to $5,000, if it remains vacant).
These eligible moving expenses can be deducted from income you earn at your new job. If your expenses exceed your employment income for that year, you can carry forward any unused amounts to the next year.
Maximize all available tax credits and deductions
While single Canadians don’t have the advantage of transferring credits with their spouse, there are still several tax credits and deductions that can help reduce your tax bill. Your personal circumstances could provide several opportunities for tax savings, including:
- Child care expenses.
- The eligible dependant credit (a major credit for single parents).
- The Canada Caregiver Credit (for those caring for people with health conditions).
- Spousal support payments (generally tax deductible).
- A broad range of eligible medical expenses.
- Adoption-related expenses.
- Disability tax credit.
- Union and professional dues.
Make sure you’re maximizing your tax savings
Your IG Advisor can help ensure that you’re using every tax-saving device available to you. Set up a meeting to go over your tax planning today. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
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