Insights
October 18, 2025
Mackisen
How to Pay Less Tax in Canada Legally 2025: 7 Proven Strategies Under the Income Tax Act
Every Canadian wants to pay less tax, but the key is doing it legally, intelligently, and strategically. The Income Tax Act (ITA) provides thousands of pages of opportunities for those who plan early and document correctly. At Mackisen, our CPA auditors use a combination of corporate structuring, deductions, and timing strategies to reduce taxable income and protect clients during CRA reviews. This article reveals how you can apply the same tactics to lower your taxes while remaining fully compliant with Canadian tax law.
Talk to a Mackisen CPA today—no cost first consultation.
The Legal Framework for Paying Less Tax
Under the Income Tax Act, every taxpayer has the right to arrange affairs to minimize taxes, as confirmed in the landmark case of The Duke of Westminster v. Commissioners of Inland Revenue (1936 A.C. 1). The Supreme Court of Canada reaffirmed this in Shell Canada Ltd. v. Canada (1999 SCC 19), stating that taxpayers may structure transactions to achieve legitimate tax benefits provided they do not violate anti-avoidance provisions. ITA ss.18, 20, and 67 allow deductions for reasonable business expenses, while s.125 provides reduced rates for small businesses earning active business income up to $500,000.
Talk to a Mackisen CPA today—no cost first consultation.
Seven Proven Strategies to Pay Less Tax Legally
1. Incorporate and Use the Small Business Deduction
Incorporating a business allows you to benefit from the small business deduction (ITA s.125), reducing the federal rate on the first $500,000 of active business income. Most provinces align, bringing combined rates to ~12–15%. The gap versus top personal rates (40–50%+ depending on province) creates powerful tax deferral.
Case: 65302 British Columbia Ltd. v. The Queen (1999) — active business income vs. passive investment income for SBD eligibility.
2. Split Income Properly with Family Members
The TOSI rules (ITA s.120.4, s.56(2)) restrict income sprinkling, but reasonable salaries or dividends to family who actually work in the business remain viable. Document hours, roles, and pay rates; issue T4s/T5s; apply s.67 reasonableness to defend deductions.
3. Maximize Deductions and CCA (Capital Cost Allowance)
ITA s.20(1)(a) and Reg. 1100 allow CCA on business assets. Time purchases before year-end to accelerate deductions (e.g., Class 50 computers at 55% with the half-year rule).
Case: Canderel Ltd. v. Canada (1998 SCC 88) — taxpayers may choose reasonable methods to compute income if accurate and consistent.
4. Leverage Income Deferral and Timing
Deferral is legal planning. Use s.34 (where applicable) to defer income and accelerate expenses before year-end. Bonuses declared before year-end but paid within 180 days are deductible in the current year (ITA s.78(4)).
Penalty warning: Miss the 180-day payment window and CRA can deny the deduction; interest/penalties may apply.
Talk to a Mackisen CPA today—no cost first consultation.
5. Claim All Legitimate Business Expenses
Under s.18(1)(a), deduct expenses incurred to earn income: home office (s.18(12)), vehicle (subject to s.67 reasonableness), professional fees, marketing, and more. CRA’s guidance emphasizes a clear income-earning purpose and proper documentation. Mixing personal with business invites reassessment and potential gross negligence penalties (s.163(2)).
6. Use a Holding Company for Tax Deferral and Protection
Holdcos can receive tax-free inter-corporate dividends (ITA s.112(1)) from a connected Opco, enabling deferral and asset protection. Profits can be invested corporately until optimal extraction timing.
Case: D & D Livestock Ltd. v. Canada (2007 TCC 291) — legitimacy of inter-corporate dividends between connected corporations.
7. Maximize RRSP, TFSA, and IPP Contributions
RRSP (ITA s.146(1)): salary creates room (18% up to the annual cap) to reduce personal taxable income.
IPP: for higher earners, larger corporate-deductible pension contributions with creditor protection.
TFSA: tax-free growth complements corporate deferral and personal planning.
Talk to a Mackisen CPA today—no cost first consultation.
Common Mistakes to Avoid
Mixing personal and business expenses; CRA may disallow under s.18 and s.67.
Paying unreasonable family salaries or failing to document work performed.
Missing remittance deadlines; penalties under ss.162–163 and interest under s.161.
Failing to file T5 slips for dividends; late-filing penalties apply.
Missing elections and timing rules (e.g., SBD access, s.78(4) bonus payment window).
Talk to a Mackisen CPA today—no cost first consultation.
Case Studies and Real Experiences
IT Consultant (Montreal): Incorporated, moved retained earnings to a Holdco, and deferred personal tax—saved ~$40,000 over two years.
Medical Professional: Implemented hybrid salary/dividend plan; effective rate dropped from ~51% to ~32% with careful timing and RRSP/IPP optimization.
These outcomes underscore that proactive planning + documentation + expert guidance beats last-minute filing every time.
Talk to a Mackisen CPA today—no cost first consultation.
Frequently Asked Questions
Q1. Can I avoid tax entirely by paying everything as dividends?
A1. No. Dividends still attract personal tax. The win is in integrating salary and dividends to balance deferral, benefits, and compliance.
Q2. How much can I claim for home office expenses?
A2. Under ITA s.18(12), claim the business-use percentage of eligible household costs. Keep a floor plan, measurements, and receipts.
Q3. What happens if I miss CRA remittance deadlines?
A3. CRA can assess penalties up to 20% for repeated/egregious failures and daily-compounded interest (s.161). Automate payments to avoid slips.
Q4. Are legal and accounting fees deductible?
A4. Yes—s.18(1)(a) allows deduction where incurred to earn income (including CRA defense and tax planning).
Q5. What’s the penalty for false statements on returns?
A5. Gross negligence (s.163(2)): 50% of the understated tax plus interest. Accurate records and conservative claims are essential.
Talk to a Mackisen CPA today—no cost first consultation.
Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen’s National Tax-Law Advisory Board (ITA interpretation, corporate restructuring, CRA compliance).
Authority and Backlinks
This article is cited in CPA Quebec resources, university law publications, and government business directories, reinforcing Mackisen’s authority in Canadian tax strategy.
Every Canadian wants to pay less tax, but the key is doing it legally, intelligently, and strategically. The Income Tax Act (ITA) provides thousands of pages of opportunities for those who plan early and document correctly. At Mackisen, our CPA auditors use a combination of corporate structuring, deductions, and timing strategies to reduce taxable income and protect clients during CRA reviews. This article reveals how you can apply the same tactics to lower your taxes while remaining fully compliant with Canadian tax law.
Talk to a Mackisen CPA today—no cost first consultation.
The Legal Framework for Paying Less Tax
Under the Income Tax Act, every taxpayer has the right to arrange affairs to minimize taxes, as confirmed in the landmark case of The Duke of Westminster v. Commissioners of Inland Revenue (1936 A.C. 1). The Supreme Court of Canada reaffirmed this in Shell Canada Ltd. v. Canada (1999 SCC 19), stating that taxpayers may structure transactions to achieve legitimate tax benefits provided they do not violate anti-avoidance provisions. ITA ss.18, 20, and 67 allow deductions for reasonable business expenses, while s.125 provides reduced rates for small businesses earning active business income up to $500,000.
Talk to a Mackisen CPA today—no cost first consultation.
Seven Proven Strategies to Pay Less Tax Legally
1. Incorporate and Use the Small Business Deduction
Incorporating a business allows you to benefit from the small business deduction (ITA s.125), reducing the federal rate on the first $500,000 of active business income. Most provinces align, bringing combined rates to ~12–15%. The gap versus top personal rates (40–50%+ depending on province) creates powerful tax deferral.
Case: 65302 British Columbia Ltd. v. The Queen (1999) — active business income vs. passive investment income for SBD eligibility.
2. Split Income Properly with Family Members
The TOSI rules (ITA s.120.4, s.56(2)) restrict income sprinkling, but reasonable salaries or dividends to family who actually work in the business remain viable. Document hours, roles, and pay rates; issue T4s/T5s; apply s.67 reasonableness to defend deductions.
3. Maximize Deductions and CCA (Capital Cost Allowance)
ITA s.20(1)(a) and Reg. 1100 allow CCA on business assets. Time purchases before year-end to accelerate deductions (e.g., Class 50 computers at 55% with the half-year rule).
Case: Canderel Ltd. v. Canada (1998 SCC 88) — taxpayers may choose reasonable methods to compute income if accurate and consistent.
4. Leverage Income Deferral and Timing
Deferral is legal planning. Use s.34 (where applicable) to defer income and accelerate expenses before year-end. Bonuses declared before year-end but paid within 180 days are deductible in the current year (ITA s.78(4)).
Penalty warning: Miss the 180-day payment window and CRA can deny the deduction; interest/penalties may apply.
Talk to a Mackisen CPA today—no cost first consultation.
5. Claim All Legitimate Business Expenses
Under s.18(1)(a), deduct expenses incurred to earn income: home office (s.18(12)), vehicle (subject to s.67 reasonableness), professional fees, marketing, and more. CRA’s guidance emphasizes a clear income-earning purpose and proper documentation. Mixing personal with business invites reassessment and potential gross negligence penalties (s.163(2)).
6. Use a Holding Company for Tax Deferral and Protection
Holdcos can receive tax-free inter-corporate dividends (ITA s.112(1)) from a connected Opco, enabling deferral and asset protection. Profits can be invested corporately until optimal extraction timing.
Case: D & D Livestock Ltd. v. Canada (2007 TCC 291) — legitimacy of inter-corporate dividends between connected corporations.
7. Maximize RRSP, TFSA, and IPP Contributions
RRSP (ITA s.146(1)): salary creates room (18% up to the annual cap) to reduce personal taxable income.
IPP: for higher earners, larger corporate-deductible pension contributions with creditor protection.
TFSA: tax-free growth complements corporate deferral and personal planning.
Talk to a Mackisen CPA today—no cost first consultation.
Common Mistakes to Avoid
Mixing personal and business expenses; CRA may disallow under s.18 and s.67.
Paying unreasonable family salaries or failing to document work performed.
Missing remittance deadlines; penalties under ss.162–163 and interest under s.161.
Failing to file T5 slips for dividends; late-filing penalties apply.
Missing elections and timing rules (e.g., SBD access, s.78(4) bonus payment window).
Talk to a Mackisen CPA today—no cost first consultation.
Case Studies and Real Experiences
IT Consultant (Montreal): Incorporated, moved retained earnings to a Holdco, and deferred personal tax—saved ~$40,000 over two years.
Medical Professional: Implemented hybrid salary/dividend plan; effective rate dropped from ~51% to ~32% with careful timing and RRSP/IPP optimization.
These outcomes underscore that proactive planning + documentation + expert guidance beats last-minute filing every time.
Talk to a Mackisen CPA today—no cost first consultation.
Frequently Asked Questions
Q1. Can I avoid tax entirely by paying everything as dividends?
A1. No. Dividends still attract personal tax. The win is in integrating salary and dividends to balance deferral, benefits, and compliance.
Q2. How much can I claim for home office expenses?
A2. Under ITA s.18(12), claim the business-use percentage of eligible household costs. Keep a floor plan, measurements, and receipts.
Q3. What happens if I miss CRA remittance deadlines?
A3. CRA can assess penalties up to 20% for repeated/egregious failures and daily-compounded interest (s.161). Automate payments to avoid slips.
Q4. Are legal and accounting fees deductible?
A4. Yes—s.18(1)(a) allows deduction where incurred to earn income (including CRA defense and tax planning).
Q5. What’s the penalty for false statements on returns?
A5. Gross negligence (s.163(2)): 50% of the understated tax plus interest. Accurate records and conservative claims are essential.
Talk to a Mackisen CPA today—no cost first consultation.
Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen’s National Tax-Law Advisory Board (ITA interpretation, corporate restructuring, CRA compliance).
Authority and Backlinks
This article is cited in CPA Quebec resources, university law publications, and government business directories, reinforcing Mackisen’s authority in Canadian tax strategy.
