How do I maximize my income-tax return?

The cost of everything—food, clothes, gas, housing—has been rising lately. How do you improve your cash flow so you can tackle rising costs and still be able to save money toward your retirement? One way could be to maximize your income-tax savings. Let’s look at some strategies you can use, both during tax season and throughout the year.

Maximize your refund

During tax season, you may be trying to get as big a refund as you can, or at least to reduce your tax bill. Once you calculate your income and have an idea of your tax bracket and marginal tax rates, you can start claiming various deductions and credits to bring down the taxes you owe or increase your chances for a refund. 

Maximize your deductions and credits

Deductions and credits can bring down your tax bill and even result in a refund. Deductions will reduce your taxable income and can reduce your marginal tax rate. Refundable and nonrefundable tax credits reduce the tax you owe. 

You’re probably familiar with some deductions and credits. But do you claim everything you’re entitled to? Take the time to see which deductions and credits apply to your situation. Here are some of the different types:

  • Family deductions and credits for childcare, support payments, and caregiving
  • Employment expenses, such as annual union and professional dues, moving expenses, and home office expenses
  • Eligible medical expenses not covered by a government or private plan
  • Education and training, including post-secondary and adult basic education for yourself, a child, or spouse; interest on student loans; and the Canada training credit
  • Home buyer’s credit if you’re a first-time home buyer
  • Pension income credit if you’re 65 or over and get pension income
  • Donations and gifts you made to certain institutions
  • Provincial or territorial credits you may be entitled to  

Contribute to your RRSP

Contributing to your Registered Retirement Savings Plan (RRSP) or to a spousal RRSP is one of the most effective ways to reduce your taxable income while putting money away for your retirement. 

After you’ve factored in your other deductions and credits, you can determine how much to put in an RRSP. You can claim contributions that you made last year and in the first 60 days of this calendar year, up to your CRA limit. 

This gives you the chance to top up your RRSP with a lump-sum contribution to get the refund you may want and to help your RRSP grow. If you don’t have the cash available, an RRSP loan from a financial institution may be an option for you. You can pay it off with your refund or in instalments over the year, which might be more manageable.

Making good use of deductions and credits can help you get the most from your tax return. But your saving opportunities don’t end with the tax season.

After tax season

Set yourself up to maximize your next tax return and save toward your goals by taking a few steps today.

Invest your refund in your RRSP or TFSA 

If you don’t need to use your refund to pay off debt, such as an RRSP loan, you could put it where it will grow free of taxes and help you save. 

If you put it into your RRSP, you can claim the contribution next tax season and you can reduce—or even eliminate—the need to make a lump-sum contribution at tax time.

If you have the contribution room and you put your refund into your tax-free savings account (TFSA), your money grows and you can also access it anytime you need it—all tax free. 

Set up regular contributions to your RRSP 

Instead of coming up with a big sum at tax time, consider putting a small amount into your RRSP regularly throughout the year, like every payday. You’ll be saving toward your retirement and taking full advantage of the power of compounding.

Save on taxes all year

Even better than getting a tax refund is keeping that money in the first place. You don’t have to wait for tax season to save on taxes.

Take advantage of your group RRSP

If your employer offers a group RRSP with payroll deductions for contributions, these could lower the income tax that comes off each paycheque. Since your employer deducts the contribution from your income before deducting tax, these contributions immediately reduce the tax you pay. 

Reduce your deductions at the source

If you’re employed, you can ask the government to have less taxes taken off your pay for some expenses that you know you’ll have throughout the year. These include RRSP contributions (other than your group plan), childcare expenses, support payments, and medical expenses, among others. 

Once the government approves your request, your employer will start reducing the amount of income tax they take off your paycheque. Instead of claiming these expenses at tax time and waiting for a refund, you get this money each payday. This can help improve your cash flow so you can deal with these expenses as they come up. 

You can set this up by submitting a Request to Reduce Tax Deductions at Source form to the CRA. If you live in Quebec, you also need to submit an Application for a Reduction in Source Deductions of Income Tax form to Revenu Québec. You’ll need to submit your request every year.

Don’t miss out on tax savings

No matter your situation, you can save on income taxes throughout the year—all while saving toward your goals. Talk to your financial advisor or a tax professional about the right strategy for you.

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.