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In Canada, individuals and businesses are responsible for reporting their income. Failure to do so will result in fines and interest payments. If you have your own company, or just a side gig, there is more to take care of before the April 30 deadline.
Here is some information to keep in mind when filing your taxes.
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What you should know before filing
If you made less than $30,000 on your side gig last year, you can breathe easy. Sure, you still have to pay income tax on the money you earned, but you don’t need to worry about collecting (or paying) GST or HST to the Canada Revenue Agency.
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Failure to do so will result in penalties from the CRA, such as being fined.
Signing up for a GST and HST number could be worth it — even if your business makes less than $30,000 — if your business generates a lot of expenses, says Jamie Golombek, managing director, tax and estate planning at CIBC.
Registering can allow you to recoup some of the GST/HST you paid, but some folks find it tedious and time consuming. It requires you to document your expenses and may not be worth it if you have a low income, or don’t have plans to grow your business.
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“It’s probably not worth registering for GST or HST, unless your expenses are in the thousands of dollars and you can recoup hundreds of dollars of GST or HST,” Golombek says.
Expenses you can claim
Business expenses can be deducted from your taxable income, lowering the amount you are responsible for.
- Rent
- Fuel costs
- Repairs
- Travel
A common mistake people make is being too aggressive on what they label as a business expense, Golombek says. This can also lead to an audit, and the expense may be rejected.
Consider your tax bracket
Depending on how much you make you’ll be placed in a tax bracket, which determines how much income tax you pay. When reporting your taxes, the income from your side hustle is combined with your main income. The combined amount will dictate what tax bracket you fall under.
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Here are the tax brackets and income tax rate for the 2022 tax year:
- 15% for $50,197 or less
- 20.5% for $50,197 to $100,392
- 26% for $100,392 to $155,625
- 29% for $155,625 to $221,708
- 33% for more than 221,708
In total, employees in Canada will be paying both their provincial and federal governments when reporting their income. Make sure you know which tax bracket you fall under as you file your tax return.
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Lowering your taxable income
If you’re right on the border between brackets, it is possible to lower your taxable income to reach a lower tax rate. The most common way to do this is by contributing to a Registered Retirement Savings Plan. Contributing to your RRSP can reduce your taxable income, qualifying you for a lower tax bracket.
The maximum amount you can contribute is based on your income from the previous year, your deduction limit, plus any unused contribution room you haven’t used in previous years. The deduction limit for the 2022 tax year is 18% of your income, up to a maximum of $29,210. For 2023 the deduction limit is 18% of your income, up to a maximum of $30,780. The limit is also affected by how much you’ve already contributed, as well as your employment status.
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The good news is that there’s still a little bit of time to reduce your taxable income. For your 2022 taxes, you have until March 1, 2023 to add to your RRSP.
Once you’ve put money in your RRSP, you should probably keep it there. That’s because you’ll have to pay penalties if you take it out before retirement.
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Consider charitable donations
Another option is to donate to a charity of your choice. Doing so will allow you to claim a charitable tax credit, which can also lower your taxable income.
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“Canada is one of the few countries that has strict guidelines on charities, they have to provide you receipts on how they spend your money,” Blumberg says, warning some charities may not spend your money responsibly.
You may also want to consider giving to lesser-known charities, Blumberg says. Your donation can make more of a difference there, rather than a major charity that already receives millions in funding.
“BIPOC charities receive far less money than other charities, consider donating to them,” Blumberg says.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.