Let’s face it: nobody enjoys handing over a big chunk of their hard-earned money to the tax man. And while we all know taxes help fund our roads, schools, and hospitals, the reality is that the more you earn, the more you pay. In Canada, this tax rate can reach up to 44% for high-income earners. And that doesn’t include the 15% clawback for OAS. But what if you could trim down what you pay, even just a little?
This article introduces the “Fifteen Percent Attitude”—a practical approach to reducing your tax load as much as possible, staying within the law, and keeping more of your income for your future. Let’s dig into strategies, useful tax shelters, and how to make small, effective changes that can lead to a lower tax burden. Ready to get started? Read on.
Understanding Canada’s Tax System
The Canadian tax system is progressive, meaning the more you make, the higher percentage of your income you pay. The average Canadian tax rate sits around 23%, but as you move up in income, you could pay as much as 46% in Ontario. We are only talking about income taxes here, not the myriad of other taxes our governments impose. Taxes fund everything from healthcare to education to infrastructure, so it’s no surprise they keep climbing—especially after the financial strain of the recent global pandemic.
Governments will continue looking for ways to raise revenue, and while there’s no blank cheque for all our national needs, there’s a big lesson here: the more services we ask for, the more we’ll likely pay for them in the end. That’s why now, more than ever, it’s important to take advantage of every legitimate tool to reduce your own tax load.
The Fifteen Percent Attitude: Keeping Your Tax Bill Low
The goal here is simple: to set yourself up for a tax rate that feels reasonable—like aiming for 15%. Here’s the idea: by taking control of your finances and making smart choices, you can live well and pay less in taxes. How? By using every tool and strategy available to reduce or defer taxes. I’ve retired with this attitude, keeping my taxes down while enjoying the lifestyle I want, and you can too. Read more about David’s journey in David’s Profile.
Tax Reduction Strategies for Everyone
Let’s start with some core methods anyone can use to start chipping away at their taxes. These strategies don’t require you to be wealthy or have fancy financial degrees—just a bit of planning and the willingness to make some practical changes.
1. Max Out Your Registered Retirement Savings Plan (RRSP)
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Tax-Deferred Growth:
Contributions to an RRSP are tax-deductible, meaning they reduce your taxable income now. Plus, your savings grow tax-free until you withdraw.
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Start Early, Benefit Longer:
The earlier you start contributing, the more you can grow your savings without paying taxes on the earnings.
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Be Mindful at Withdrawal:
Withdraw RRSP funds strategically in retirement, when your income is likely lower, to stay in a lower tax bracket.
Think of your RRSP as a shelter where your money grows in peace—at least from the tax man! Over time, the compounding effect of tax-deferred growth can make a significant difference.
2. Use Your Tax-Free Savings Account (TFSA) Wisely
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Tax-Free Withdrawals:
Unlike the RRSP, withdrawals from your TFSA are entirely tax-free, whether it’s next year or 20 years from now.
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Flexible Saving:
Contribute any amount up to the annual limit (which is cumulative over the years), and enjoy tax-free growth on your investment returns.
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Great for Long-Term Savings:
Use your TFSA for long-term savings or emergency funds, but let your money grow untouched if you want to maximize the tax-free advantage.
The TFSA is like a tax-free treasure chest that can be opened at any time. Use it as a flexible tool for both short- and long-term financial goals.
Keep Your Taxes Low Through Income Splitting
If you’re married or have a common-law partner, you might consider income splitting. This strategy can be effective in lowering your family’s overall tax burden. Both David and Jim use this strategy in their respective tax planning.
How Income Splitting Works
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Shift Income to a Lower Tax Bracket:
If your spouse is in a lower tax bracket, shifting some of your income to them can reduce the overall amount of tax you pay as a couple.
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Using Pension Income:
Canadians aged 65 and older can split up to 50% of eligible pension income with a spouse, potentially lowering the family’s overall tax rate.
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Transfer Investments:
Investing in your lower-income spouse’s name can help spread out investment gains, keeping more income in a lower tax bracket.
This strategy is a little like teamwork. When each partner shares the tax load, the family as a whole can enjoy more savings.
Another article on pension splitting How income splitting can lower your household taxes from financial experts Edward Jones.
Consider Moving to a Lower-Tax Province
Not all provinces are created equal when it comes to taxes! For instance, if you’re paying the highest tax rates in Quebec, you might pay significantly less in a province like Alberta. Although moving isn’t practical for everyone, it’s worth considering if you’re planning to retire or if you have the flexibility to work remotely.
Remember, lower taxes can mean a lot of extra money in your pocket over time. It’s always smart to weigh your options if a move is on the table.
Final Thoughts: Make the Most of Tax Benefits Available to You
Reducing your taxes isn’t just about finding loopholes; it’s about taking advantage of programs and incentives designed to help Canadians build a more secure financial future. By making smart use of tools like the RRSP and TFSA, using income-splitting strategies, and understanding where your tax dollars go, you’re better equipped to make financial decisions that work in your favour.
Tips to Adopt the Fifteen Percent Attitude
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Stay Informed:
Keep up with changes in tax laws, limits for RRSPs and TFSAs, and any new tax-saving opportunities.
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Plan for the Long Haul:
Reducing your taxes isn’t a one-time effort. It’s about creating habits and strategies that help you over the years.
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Get Professional Help:
If your situation is complex, consult a tax expert who can help you make the most of your tax-planning options.
Embracing the “Fifteen Percent Attitude” is about taking control of your tax situation, not letting it control you. You might be surprised how much more you can keep in your pocket with a little planning and a few smart choices.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
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The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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