As tax deadlines approach, one of the top questions on people’s minds is, “How can I reduce my taxes?” The sentiment often follows that if the wealthy simply paid more taxes, the rest of the population would have more breathing room.
Despite the rhetoric, Canada’s top earners pay a decent portion of all federal and provincial taxes. This is after going through all available legal channels to reduce their tax liability.
Below, I’ll outline some statistics on how much Canada’s wealthiest pay and share some of the tried-and-tested strategies they use to reduce their taxes (and how you can, too).
Percentage of taxes paid by the top 10%
In April 2022, NDP Leader Jagmeet Singh stated he believed Trudeau’s proposed tax increase for insurance companies and big banks was insufficient.
But the statistics tell a slightly different story.
The top 10% of earners (those who earn over $102,400 per year or more annually as of 2020) in Canada account for 53% of the country’s total provincial and federal tax income, according to CRA data.
Should they pay more?
That’s still up for debate; however, the fact is that one-tenth of the population accounts for over one-half of Canada’s personal income tax revenue.
Canada’s 2023 tax brackets: how much the wealthy will pay this year
To account for recent inflation, Canada’s 2023 federal income tax brackets have been increased to the following:
- 15% on the portion of taxable income that is $0 to $53,359
- 20.5% on the portion of taxable income over $53,359 up to $106,717
- 26% on the portion of taxable income over $106,717 up to $165,430
- 29% on the portion of taxable income over $165,430 up to $235,675
- 33% on the portion of taxable income over $235,675
This means that Canada’s wealthiest earners who earn over $235,675 will be subject to a 33% marginal federal income tax rate.
On top of that, they will also pay provincial income taxes, which vary depending on what province they reside in. For example, British Columbia imposes a 20.5% provincial tax on the portion of any taxable income over $240,716. In comparison, Ontario has a lower 13.16% provincial tax on the portion of any taxable income over $220,000.
Strategies the wealthy use to reduce their taxes
If it weren’t for the following tax strategies, Canada’s top earners would likely pay an even higher percentage of the country’s total taxes. However, the wealthy often use legal tax loopholes to limit their tax liability.
1. Business tax write-offs
There are currently more than 1.3 million small businesses in Canada as of June 2022, according to Statistics Canada. Business owners who incorporate have a host of legal tax deductions they can take advantage of.
Those who are self-employed (sole proprietorships) or do freelance work on the side can also benefit from business tax write-offs. For example, remote freelancers can write off a percentage of their rent, internet, or electric bills since they’re used for business purposes.
2. Tax-sheltered investment income
Canada offers several opportunities to take advantage of tax-sheltered investment growth. The most popular is the TFSA program, which allows any Canadian resident over 18 to open a tax-free savings account.
Other examples include RRSP retirement accounts, RESP education savings accounts, and most recently, the tax-free First Home Savings Account (FHSA).
While there are annual and lifetime contribution limits for these tax-sheltered accounts, many wealthy people take advantage of these programs and try to maximize their contributions.
3. Permanent life insurance
If you’ve maxed out your registered accounts such as your RRSP and TFSA, another way your investments could earn money tax-free is by buying permanent life insurance, such as whole life or universal life.
There is a cash value component that grows over time with permanent life insurance. This cash value can be accessed through policy loans or withdrawals, and any growth in the cash value is generally not subject to income tax. This can provide a tax-advantaged way to save and invest money.
4. Donating to charity
Donating money to charity is one of the classic methods higher-income groups use to reduce their taxes. As long as the individuals donate to registered charities and have the receipts to prove their donation, they can be used to claim tax credits.
Taxpayers can claim a 15% tax credit on donations worth up to $200 and up to 29% on donations over $200.
How low- to moderate-income earners can reduce their taxes in 2023
Many of the same strategies the wealthy use can also be followed by lower earners to reduce their taxes.
Maximizing what you can contribute to your TFSA, RRSP, or RESPs is a great place to start, and starting a side hustle as a sole proprietorship can provide you with opportunities for tax write-offs. Donating to charity can also reduce your tax bill as well.