Year End Tips to Save you Money
As the holiday season approaches most of us are focused on spending time with family and friends. It’s also the opportune time to implement final income tax strategies and be mindful of how existing and new tax changes can effectively reduce your 2018 tax bill. Here is a laundry list of strategies to consider for 2018.
Investors should consider the following strategies for their portfolios:
Contribute to an RESP
There are other important benefits of RESPs that you should take advantage of before year-end. Contributions to an RESP entitle you to a grant, known as the Canada Education Savings Grant (CESG) of up to $500 per year, or $1,000 if there is unused grant room to a maximum of $7,200 per beneficiary. Consider contributing at least $2,500 to an RESP by year-end to receive the maximum CESG for this year, or possibly more if you have unused grant room from previous years.
If you haven’t started an RESP for your growing children it may not be too late to maximize the CESG. In fact, if your child is age 10 or younger, you still have the opportunity to maximize the CESG. Also, if your child is age 15 and you have never started an RESP for that child, consider contributing at least $2,000 by year-end. Otherwise, your child is not eligible to receive any CESG at age 16 or 17, regardless of whether RESP contributions are made in those years. Speak to your financial advisor about obtaining as much grant as possible for your RESP.
Contribute to a Tax-Free Savings Account (TFSA)
Effective January 1st, 2009, annual contributions can be made into a TFSA up to a cumulative total of $52,000 (including 2017). The contribution limit in 2018 is $5,500 which is indexed for inflation. Investment income earned and withdrawals from a TFSA are tax-free, giving you the financial flexibility to save for specific goals without the impediment of taxes. Consider contributing to your TFSA before year-end and consider making your 2019 contribution in January 2019 to take advantage of the tax-free income and withdrawals that a TFSA provides.
Also, if you expect to withdraw money from your TFSA in 2019, consider withdrawing the funds by year-end 2018 so that you don’t have to wait until 2020 to re-contribute those funds.
Contribute to a Registered Disability Savings Plan (RDSP)
If you or a loved one is a Canadian resident, has a valid SIN and qualifies for the Disability Tax Credit (DTC) (form T2201 can be filled out by your doctor or nurse practitioner and filed with the CRA), an RDSP may be established to assist in securing the financial future for a beneficiary with a disability. In addition, a beneficiary can access the federal non-refundable disability amount of $8,113 for 2018 allowing a tax credit of $1,216.95. While contributions to an RDSP are not tax deductible, investment returns earned inside the RDSP grow on a tax-deferred basis for as long as the funds remain in the plan. There are no annual maximum contribution limits, but rather a lifetime limit of $200,000 that can be contributed at any time up to the end of the year in which the RDSP beneficiary reaches the age of 59.
What makes RDSPs so appealing are the generous government grants and bonds that can go a long way to boosting the savings in the RDSP. Depending on the disabled person’s family net income, the beneficiary may qualify for matching government contributions in the form of a Canada Disability Savings Grant (CDSG), equal to as much as $3,500 on the first $1,500 of contributions. In addition, the government will provide an annual Canada Disability Savings Bond (CDSB) of up to $1,000 based solely on family net income, and not on contributions. As a result, RDSPs are a great opportunity for beneficiaries with disabilities to increase savings for retirement. Speak to your financial advisor about establishing a Mackenzie RDSP for family members with disabilities.
Investors should consider the following strategies for their RRSP:
Make your RRSP contribution on time
RRSP contributions must be made no later than 60 days after the calendar year-end in order to deduct against 2018 earnings. The RRSP contribution deadline is March 1st, 2019, and the maximum RRSP contribution limit for 2018 is $26,230. Make your contribution as soon as possible as you will have more money working for you sooner. Refer to your 2017 Notice of Assessment/Reassessment, which will inform you of your available RRSP contribution limit. Any excess contributions exceeding $2,000 are subject to a 1% per month penalty tax.
Make the most of your unused RRSP contribution room
If you have contributed less than the maximum permitted in prior years to your RRSP, you should have unused RRSP contribution room carried forward to 2018. Consider topping up your RRSP to the maximum possible in order to take advantage of the benefits RRSPs have to offer. If you’re short on cash to maximize your RRSP room, consider borrowing to make your RRSP contribution. Consider applying for an RRSP Loan as an option and payback the loan with your tax refund in 2019. Speak to your financial advisor about ways you can maximize your RRSP contribution room.
Contribute to a spousal RRSP
If you have a spousal RRSP established, make your spousal RRSP contribution before year-end to minimize the possibility of having the attribution rules apply on any future withdrawals. For example, if you make a spousal RRSP contribution this year, your spouse can safely withdraw funds from the spousal plan and pay tax on the income as early as January 1st, 2021. A spousal RRSP contribution made in January 2019 will mean that your spouse will have to wait until January 2022 before he / she can safely withdraw funds without the attribution rules applying.
Contribute to a spousal RRSP if your spouse / CLP passed away this year
Where your spouse/CLP passed away with unused RRSP contribution room this year, the executor of the estate (which may be you) should consider making a final contribution to a spousal RRSP by March 1st, 2019. This will provide tax savings as the RRSP contribution can be deducted against income on the deceased’s final tax return.
Base withdrawals on age of younger spouse/CLP
If you will be 71 by the end of 2018, you must convert your RRSP to a RRIF and begin drawing an income. Consider basing the minimum RRIF withdrawal on the age of the younger spouse. Your annual RRIF income could be taxed at lower graduated rates, allowing more money to be retained in your RRIF account, and a longer tax deferral.
Delay HBP withdrawals until after year-end
The Home Buyer’s Plan (HBP) is a great way to help fund a down payment for a home. However, there are some tricky rules that can be handled more easily if you delay your withdrawal until after year-end. Repayments begin two years following the year of withdrawal. Delaying your withdrawal until after year-end allows you more time to purchase a home, make more withdrawals under the plan and extend the time before you must begin repaying funds to your RRSP.
Make your required HBP repayment
You are required to begin your HBP repayments in 2018 if you participated in the program prior to 2017. To avoid any unnecessary income inclusion, be sure to make your required repayment and designate it on Schedule 7 of your personal tax return. Check your latest Notice of Assessment from the CRA for more information if you’re unsure of your repayment. If you are a first time homebuyer, don’t forget to claim the 15% federal non-refundable tax credit available for up to $5,000 of the purchase cost. The maximum credit is $750.
Consider missing your HBP repayment
As discussed above, failure to meet your minimum HBP repayment creates an income inclusion. However, in some instances it may work to your advantage to intentionally miss the repayment. Consider this strategy if you are in an unusually low-income year, or where the funds were borrowed from a spousal RRSP and your spouse/CLP is in a lower tax bracket. HBP withdrawals are not subject to the spousal RRSP attribution rules and therefore the income inclusion will fall in the hands of the annuitant spouse – another great way to income split!
Did you sell your principal residence in 2018?
New tax rules enacted in 2016 require you to report the sale of real estate dispositions including your principal residence even if the gain is exempt. If a property is not reported, fines amounting to $100/month up to a maximum of $8,000 can be incurred. The “one plus” rule will no longer apply for principal residences acquired in a taxation year in which the purchasing individual was not resident in Canada.
Do you hold foreign property in excess of $100K?
The T1135 Form was changed in 2015 to introduce a simplified reporting method for individuals who own specified foreign property with a total cost of $100,000 or more but less than $250,000 throughout the year. Simplified reporting requires the taxpayer to only declare what types of property are held by the taxpayer (i.e. funds, shares, real property, etc.), the three countries holding the most specified foreign property by cost, the income from the specified foreign property, and the total gains or losses from the disposition of all foreign property in the year. Individuals who own specified foreign property with a total cost of less than $100,000 throughout the whole taxation year are still exempt from T1135 reporting, while individuals who own specified foreign property with a total cost exceeding $250,000 at any point in the taxation year are not eligible for simplified reporting.
Know your U.S. filing requirements
If you are a U.S. person (i.e., citizen, resident or green card holder of the U.S.) living in Canada throughout 2018, be aware of various U.S. reporting requirements in addition to U.S. income tax filings. Some examples include the FinCEN Report 114 (also known as FBAR) if you own financial accounts in excess of $10,000 USD at any time during 2017, Form 8938 – Statement of Foreign Assets, if you own certain assets that exceed either $200,000 USD at the end of 2018, or $300,000 USD at any time during the year if you live in Canada. In addition, if you are a U.S. person and contribute to, or are a beneficiary of an RESP, you may need to file Form 3520 / 3520-A in the U.S. This form may also need to be filed in the U.S. if you own a Tax Free Savings Account. These forms have various deadlines and penalties for non-compliance and are dependent on assets you own throughout 2018. These are complex issues and should be dealt with by a qualified cross-border tax advisor.
Beware of PFIC reporting obligations
If you are a U.S. person (i.e., U.S. citizen / resident or green card holder of the U.S.) with Canadian mutual funds, you are considered to be a shareholder of a Passive Foreign Investment Corporation (PFIC) for U.S. tax purposes and are required to file IRS Form 8621 with your U.S. tax return. PFIC shareholders are subject to negative U.S. tax implications. One method to reduce the tax impact and avoid nasty interest and penalty charges is to file a Qualified Electing Fund (QEF) election when you file your U.S. tax return. QEF elections are only available where mutual fund companies are able to provide you with an Annual Information Statement (AIS) with respect to your investment holdings. Work with your financial advisor to determine whether the PFIC rules apply to you, and what you can do to minimize the tax impact.
Claim a “Closer Connection Exception”
If you, like many Canadians (i.e., snowbirds) spend on average approximately 4 months of the year in the U.S., you may be automatically considered a U.S. resident for U.S. tax purposes if you meet a specific days test in the U.S., known as the “substantial presence test”. As a result, you may be subject to U.S. tax and filing requirements even though you are Canadian resident and pay Canadian taxes. However, if you meet this test, you can avoid being considered a U.S. resident by claiming that you actually have a closer connection to Canada. To claim the closer connection exception, you must file Form 8840 with the IRS and meet other conditions. Speak to a tax professional if, during 2017 and in the previous two years, you have spent time in the U.S. and may benefit from this exception.
Taxpayers with pensions, income plans and government benefits also have opportunities to minimize tax by implementing the following strategies:
Make an advanced RRSP contribution
If you will be 71 at the end of this taxation year and expect to have earned income in 2019 or future taxation years, consider making an RRSP over contribution in December 2018. Earned income in 2018 creates RRSP contribution room for 2019. However, you will not be permitted to contribute to an RRSP next year, since you are required to convert your RRSP to a RRIF before year-end. This strategy does mean that you will have over-contributed for one month and hence subject to a 1% per month penalty tax. However, you will also be entitled to an RRSP deduction in 2019 or future taxation years that will provide tax savings which far outweigh the penalty tax cost. If you took advantage of this strategy in 2018, don’t forget to file a T1-OVP form to calculate the penalty tax cost. Speak to your financial advisor about the specifics in your situation.
Apply for government benefits (OAS & CPP)
If you have reached age 60 in 2018, consider applying for your CPP retirement pension benefit. When you apply for CPP before the age of 65, your pension will be adjusted to reflect a longer time period that you will receive benefits. There are new rules that apply to those collecting CPP benefits early, including changes to how your pension is adjusted and also the continuation of paying premiums if you continue to work prior to age 65.
If you have reached age 65 in 2018, you should also apply for Old Age Security (OAS) benefits as soon as possible. Do not delay your application after turning 65, since retroactive payments are only available for up to 11 months plus the month in which you apply for OAS. You may also choose to delay your OAS for up to five years.
Create eligible pension income
Rules were introduced in 2006 that allow for spouse’s/CLP’s to allocate up to 50% of pension income that qualifies for the existing pension income tax credit to their spouse/CLP, as a means of income splitting. If you are over 65 this year and have no other eligible pension income, consider drawing on your RRIF in order to take advantage of the income splitting opportunity presented with these rules. Additionally, if your spouse / CLP is over the age of 65 as well, you and your spouse will both qualify for the pension income tax credit. Therefore, in addition to the tax savings from income splitting, you will receive tax savings from the pension income tax credit – a double benefit! Speak to your financial advisor about applying this strategy in your specific situation.
Opt out of CPP premium payments
Under new rules for CPP retirement benefits, pensioners receiving CPP prior to age 65 and still working are required to continue paying CPP premiums. Those over age 65 (and under age 70) who are still working have the option of continuing to pay CPP premiums. If you turn age 65 this year, continue to work and are collecting CPP, consider filing an election to cease CPP premium payments. The election is CRA form CPT30 and must be filed with your employer and the CRA. Discuss the pros and cons of opting out of CPP premiums with your advisor.
Employees receive a number of taxable benefits that can be dealt with tax efficiently by following some of these strategies:
Pay interest on loans
If you have received an employee loan, a taxable benefit may exist if you pay anything less than the prescribed interest rate set by the CRA. To avoid the taxable benefit, ensure any interest owing on the loan is paid by January 30, 2019.
Defer your bonus
This is the time of year in which many employees receive bonuses for exceptional work. Consider speaking with the employer about delaying payment of the bonus until after year-end. Delaying your bonus by one month allows you to defer the resulting tax bill to April 2020, a full 16 months to when you have to file your 2019 tax return.
Reduce the stand-by charge and operating benefit
Employer provided vehicles are a great perk, but can have nasty taxable benefits in the form of a standby charge and operating benefit if you’re not careful about tax planning. To reduce the possible stand-by charge, reduce the number of days between today and year-end that the car is available to you. Also, the operating benefit could be reduced to half of the standby charge if the vehicle was used 50% or more of the time for business purposes. Finally, consider reimbursing your employer for any operating costs by February 14, 2019.
Reduce source Withholdings
If you expect a refund when you file your tax return, due to RRSP contributions, interest deductions on investment loans, charitable donations, alimony or maintenance payments, consider speaking to your employer about reducing source deductions from your pay. Alternatively, consider filing form T1213 with the CRA so that you can reduce your tax bill now, rather then waiting until April 2019 to get your refund!
Families have a number of last minute ideas that can help reduce total combined tax. Here are a few ideas:
Identify income-splitting opportunities
Families have the ability to creatively split income so that their tax bill can be reduced. Here are some popular ways families can income split to reduce taxes for 2018 and subsequent taxation years:
- Set up a prescribed rate loan with your spouse / CLP
- Create second generation income
- Swap assets with family members
- Transfer assets to adult or minor children
- Contribute to a spousal RRSP
- Apply for CPP retirement pension sharing
- Consider RESPs for a child’s education
- Consider splitting up to 50% of eligible pension income
Consider prescribed rate loans to spouse/CLP
If you are in a higher marginal bracket than your spouse/CLP, consider making a 1% (rate applicable for 2018) prescribed rate loan to your spouse/CLP. With the funds, the spouse can purchase mutual funds or other investments and any investment income earned will be taxed in the lower income spouse’s hands. The interest paid on the loan must be included in the higher taxed spouse’s income and is deductible to the lower income allowing a deduction against investment income earned.
Do you have non-deductible debt?
Have you incurred debt for personal and investment purposes? Interest on personal debt is not deductible so consider paying off personal debts first before debts incurred for investment purchases. The interest paid to generate investment income is deductible against investment income.
Do you have deductions that will be worth more if made next year?
Consider the timing of a deduction – perhaps a deduction is worth more to you next year provided you fall in a higher tax bracket. This can be useful for RRSP planning.
Installment payments
The tax credit for teachers and early childhood educators introduced in 2016 provides a 15% federal non-refundable tax credit on the cost of supplies up to $1,000. You will need to provide original copies of receipts to claim any of these tax credits.
The HATC is a federal non-refundable tax credit (max $1,500) that can be claimed by an eligible individual for expenses (max $10,000) intended to improve accessibility to a home for a person 65 or over or a person eligible for the disability amount. Home accessibility expenses can also be eligible for the medical expense tax credit which can be made directly from the form.
The Canada Caregiver Credit is available for the 2017 taxation year and onwards replaces the Caregiver, Infirm Dependent and Family Caregiver tax credits. It is a 15% non-refundable tax credit and is available whether or not you live with family members you are helping. Expenses incurred up to $6,883 for the care of dependent relatives (i.e., parents, brothers and sisters, adult children and other specified relatives) are available and an additional $2,150 of expenses incurred for the care of a dependent spouse/CLP or minor child with an infirmity. The credit will be reduced on a dollar-for-dollar basis where the dependent’s net income exceeds $16,163 (indexed for inflation for subsequent taxation years).
Are you a university student?
The education and textbook non-refundable tax credits generally allow a student to claim an amount for each month in the year that they are enrolled in a qualifying educational program at a designated educational institution and certain criteria are met. Effective January 1, 2017 the education and textbook tax credit was eliminated. Unused education and textbook credit amounts carried forward from years prior to 2017 may be claimed in 2017 and subsequent taxation years. The federal tuition non-refundable tax credit is still available.
Canada Child Benefit (CCB)
The UCCB was replaced with the CCB starting July 2016. The CCB is a tax-free monthly payment made to eligible families, of $6,400 per year for each eligible child under the age of six and $5,400 per year for each eligible child aged 6 to 17. An additional benefit of $2,730 for a child eligible for the disability tax credit. The benefit is reduced when adjusted family net income exceeds $30,000 and is dependent on the number of children per family. The max is phased out when adjusted family net income is $65,000.
Pay child care expenses to adult children
Consider paying your adult children (over age 18 in the year) for any qualifying child care services they provided to you for your younger children (age 16 or younger) throughout the year. The services must be incurred to allow you, the parent, to earn employment or business income. Qualifying child care expenses are tax deductible in the year they are paid. The income is taxable to the adult child, who is likely taxed at a very low to zero tax rate. This is a great way to income split with your family. The maximum child care expenses that can be claimed is $8,000 per child under 7, $5,000 for children between 7 and 16 and $11,000 for children eligible for the disability tax credit. Usually child care expenses must be claimed by the lower income spouse.
Have you moved residences to start a new job?
If the move allows you to be 40km closer to the new work location you could be able to deduct real estate fees on the sale of the old residence and land transfer taxes on the purchase of the new residence (other expenses available). The matter can get complicated so it is best to discuss with your tax professional to see if you qualify.
Accelerate medical expenses
Medical expenses can be claimed for any 12-month period up to the end of the year and only provide tax savings where they exceed the lesser of a) 3% of your net income or b) $2,268. Therefore, accelerate medical expenses for you, your spouse / CLP and children before year-end in order to maximize tax savings.
Review trust income
Trusts are established for a variety of purposes. Consider working with your financial advisor or tax professional to determine how much income was earned in the trust and how much income, if any, should be flowed out to the beneficiaries. Special care should be taken where Henson Trusts are established to ensure distributions from the trust do not affect any government disability benefits for the disabled beneficiary.
Trigger accrued losses before year-end
You may own securities or mutual funds which have dropped in value from the time you purchased them. If so, now might be a good time to review these investments with your financial advisor to determine whether it is prudent to continue to own it. If not, it may be time to sell the investment to trigger the capital loss.
Capital losses are used to offset capital gains and can be carried back three taxation years and carried forward indefinitely. If you have taxable capital gains this year or in the previous three taxation years consider triggering the capital loss before year-end. It is preferable to carry back losses to the earliest year possible since the oldest years will expire first. Additionally, you could have realized capital losses of previous years that can reduce the current year’s capital gain. Either way, these strategies will potentially help you reduce your 2018 tax bill.
Incorporated business owners also have tax planning opportunities.
The following are some last minute tax saving ideas with the use of corporations:
Defer your income
Consider delaying certain income you expect to receive during the remainder of this year until 2019. For example, bonuses are deductible by the corporation provided they are paid 180 days after the business year-end which means a bonus payable in 2018 could be paid in 2019 allowing a tax deferral.
The small business income tax rate will be reduced to 10 per cent effective January 1, 2018, and to 9 per cent effective January 1, 2019. Consider paying higher salaries to family members provided they are reasonable for the services performed. The higher salaries paid now can reduce corporate taxable income allowing a lower overall corporate rate while the federal rate is currently higher. Personal income tax rates should be considered.
Pay salaries to family members
Income splitting among family members is a simple strategy for an incorporated business owner. Consider paying family members (i.e. spouse / children) a reasonable salary or wage for services provided to the corporation this year. This can shift income into the hands of family members who pay lower tax rates. In addition, this provides an opportunity for children to start building RRSP contribution room.
Effective January 1, 2018, be cautious about setting your family members up as shareholders. The government will introduce reasonableness tests for dividend payments which will be applied differently for adult family members between the ages of 18-24 and ages 25 and above.
Adult family members receiving a dividend on their shares must demonstrate their contribution to the business based on four basic principles: Current or previous labor contributions; capital/equity contributions and financial risks (ex. co-signing a loan). The new reasonableness test will be used to determine whether dividends paid to related family members will be subject to top marginal personal income tax rates when dividends paid are considered unreasonable. Provided it makes sense, consider making higher dividend payments. This also applies to dividend allocations made from a trust.
Determine compensation mix
As a shareholder, you could be compensated by your corporation either in the form of salary, eligible, ineligible or capital dividends. The optimal compensation mix can only be determined after considering your financial and tax position and that of your corporation. Speak with your corporate accountant about determining what compensation mix is most appropriate in your situation.
Purchase a vehicle from your company
Consider purchasing the vehicle that the company has provided you if the car has depreciated in value since the taxable stand by charge will continue to be calculated using the original cost and not the depreciated value. This will potentially allow you to avoid the annual taxable benefits and begin receiving a tax-free car allowance from the corporation for business use of your vehicle.
Claim an ABIL
A business investment loss may be available to you if you lent money to, or invested in shares of a small business corporation that has become insolvent or bankrupt. The allowable business investment loss (ABIL) is equal to 50% of the loss and does not only offset capital gains, but can be applied against any other type of income. The ABIL rules can be quite tricky, so be sure to speak to a tax professional about your ability to claim an ABIL this year.
Shareholder loans to your company
Consider reclassifying payments made to you throughout the taxation year by your corporation as a repayment of a shareholder loan owing to you. Shareholder loan payments are tax-free and a very tax efficient way of drawing money out of the corporation with excess cash.
Shareholder loans from your company
If you have borrowed money from your corporation in the prior business taxation year, you should consider repaying the loan in full before the corporate year-end. Otherwise, you will face an income inclusion on your personal tax return for the value of the loan payment not repaid.
Make a gift or award to an employee
As an employer, you are entitled to provide up to two non-cash gifts or awards annually to employees provided the aggregate cost of the gifts, including HST / GST, do not exceed $500. If you are planning to provide gifts or awards to your employees, be sure not to exceed the $500 threshold, since exceeding the threshold will cause the entire value of the gift (not just the excess over $500) to be taxable to the employee.
2018 is quickly coming to an end. Therefore, if you wish to consider any of these strategies, contact me toassist you in implementing any strategies that benefit you.
For additional information please click below:
2018 Tax Planning Quick Reference GuideIncome Splitting Guide