December 31, 2017 is fast approaching! Below is a list of tax planning considerations to make tax season a little easier. Please contact us for further details or to discuss whether these may apply to your tax situation.
2017 YEAR-END TAX PLANNING TIPS
1) Certain expenditures made by individuals by December 31, 2017 will be eligible for 2017 tax deductions or credits including: moving expenses, child care expenses, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expense. Ensure you keep all receipts that may relate to these expenses.
2) If you own a business or rental property, consider paying a reasonable salary to family members for services rendered. Examples of services include website maintenance, administrative support, and janitorial services. Salary payments require source deductions (such as CPP, EI and payroll taxes) to be remitted to CRA on a timely basis, in addition to T4 filings.
3) A senior whose 2017 net income exceeds $74,788 will lose all, or part, of their Old Age Security. Senior citizens will also begin to lose their age credit if their net income exceeds $36,430. Consider limiting income in excess of these amounts if possible. Another option would be to defer receiving Old Age Security receipts (for up to 60 months) if it would otherwise be eroded due to high income levels.
4) You have until Monday, March 1, 2018 to make tax deductible RRSP contributions for the 2017 year. Consider the higher income earning individual contributing to their spouse’s RRSP via a spousal RRSP for greater tax savings.
5) Individuals 18 years of age and older may deposit up to $5,500 into a Tax-Free Savings Account in 2017. Consider a catch-up contribution if you have not contributed the maximum amounts for prior years. Contribution room can be found online, on CRA’s My Account.
6) A Canada Education Savings Grant for Registered Education Savings Plan contributions equal to 20% of annual contributions for children (maximum $500 per child per year) is available. In addition, lower income families may be eligible to receive a Canada Learning Bond.
7) A RDSP may be established for a person who is under the age of 60 and eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted. Grants, Bonds and investment income earned in the plan are included in the beneficiary’s income when paid out of the RDSP.
8) Consideration may be given to selling non-registered securities, such as a stock, mutual fund, or exchange traded fund, that has declined in value since it was bought to trigger a capital loss which can be used to offset capital gains in the year. Anti-avoidance rules may apply when selling and buying the same security.
9) Consider restructuring your investment portfolio to convert non-deductible interest into deductible interest. It may also be possible to convert personal interest expense, such as interest on a house mortgage or personal vehicle, into deductible interest.
10) CPP receipts may be split between spouses aged 65 or over (application to the CRA is required). Also, it may be advantageous to apply to receive CPP early (age 60-65) or late (age 65-70).
11) Teacher and early childhood educators – A federal non-refundable tax credit of 15% on purchases of up to $1,000 of eligible school supplies by a teacher or early childhood educator used in the performance of their employment duties may be available. Receipts for school supplies will be required.
12) Home accessibility tax credit – A federal non-refundable tax credit of 15% on up to $10,000 of eligible expenditures (renovations to a qualified dwelling to enhance mobility or reduce the risk of harm) may be available each calendar year, if a person 65 years or older, or a person eligible for the disability tax credit, resides in the home.
13) Did you incur costs to access medical intervention required in order to conceive a child which was not previously allowed as a medical expense? Due to a change in law, some of these expenses for the previous 10 years may now be eligible (amounts incurred in 2007 must be claimed by the end of 2017).
14) For individuals who have not yet claimed charitable donations, consider making a donation of up to $1,000 in order to get a super charged donation credit.
15) A number of EI changes have been enacted effective December 3, 2017. These include a new caregiving benefit for up to 15 weeks for those who are temporarily away from work to support or care for a critically ill or injured family member, the option to extend the parental benefit for up to 18 months (from the current 12 months) and the ability to claim EI benefits up to 12 weeks before a mother’s due date (from the current 8 weeks).
16) If EI premiums were paid in error in respect of certain non-arm’s length employees, a refund may be available upon application to CRA.
17) Consider purchasing assets eligible for capital cost allowance (CCA) before the year-end. A half-year of depreciation deduction is allowed for most assets even if it was purchased just before the year-end.
18) Effective July 1, 2017, self-employed commercial ride-sharing drivers (such as Uber drivers), have been required to register for (regardless of their total annual revenues), collect, report and remit GST/HST.
19) Employers of eligible apprentices are entitled to an investment tax credit. Also, a $1,000 Incentive Grant per year is available for the first and second year as apprentices. A $2,000 Apprenticeship Completion Grant may also be available.
20) If income, forms, or elections have been missed in the past, a Voluntary Disclosure to the CRA may be available to avoid penalties. Effective January 1, 2018, CRA has proposed to tighten the program so greater relief may be available if disclosure is made before the end of the year.
21) If income, forms, or elections have been missed in the past, a Voluntary Disclosure to the CRA may be available to avoid penalties. Effective January 1, 2018, CRA has proposed to tighten the program so greater relief may be available if disclosure is made before the end of the year.
22) Are you a U.S. Resident, Citizen or Green Card Holder? Consider U.S. filing obligations with regards to income and financial asset holdings. Filing obligations may also apply if you were born in the U.S. Information exchange agreements have increased the flow of information between the CRA and the IRS. Collection agreements enable the CRA to collect amounts on behalf of the IRS.
Higher levels of personal income are taxed at higher personal rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high income years and into low income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income, due to, for example, taking maternity/paternity leave, receiving a large bonus/dividend, or selling a company or investment assets.
In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may lose financial support in the form of reduced Canada Child Benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial or territorial programs.
There are a variety of different ways to legally smooth income over a number of years to ensure an individual is maximizing access to the lowest marginal tax rates. For example,
- In owner/managed companies, owners may take more, or less, earnings out of the company.
- Realizing investments with a capital gain/loss.
- Deciding whether to claim RRSP contributions made in the current year, or carry-forward the contributions.
- Withdrawing funds from an RRSP to increase income. Care should be given, however, to the loss in RRSP room based on the withdrawal.
- Deciding on whether or not to claim CCA on assets used to earn rental income.
While the above is generally true, in certain cases some individuals may wish to pay out additional dividends in 2017. Effective in 2018, there are proposals to increase the tax cost of dividends paid out to shareholders of a corporation that do not meaningfully contribute to the business. As such, individuals who may be subject to this higher tax rate in future years may consider increasing dividend payments in 2017. Details on this proposed change are expected to be released by December 21, 2017.
Prior to paying increased dividends, consideration should be given to a number of factors (in addition to the items noted above related to increases in income), such as the impact on the business operations, cash flow, and other agreements (like bank covenants), and whether the dividend can be paid under corporate law.
Three different types of dividends can be paid from a corporation depending on the attributes and earnings of a corporation: eligible, non-eligible and tax-free capital dividends. Due to tax rate changes, the tax cost of non-eligible dividends will likely be increasing in 2018 and 2019. As such, some may consider declaring non-eligible dividends in 2017 to access current tax rates. Changes in provincial/ territorial rates may also impact the above decision.
Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:
- Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company). The effect on the Qualified Small Business Corporation status should be reviewed before selling the shares where large amounts of capital have accumulated.
- Consider paying taxable dividends to obtain a refund from the Refundable Dividend Tax on Hand account in the Corporation.
- Individuals that wish to contribute to the CPP or a RRSP may require a salary to create earned income. RRSP contribution room increases by 18% of the previous years’ earned income up to a yearly prescribed maximum ($26,010 for 2017; $26,230 for 2018).
- Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby possibly providing greater access to the capital gain exemption.
- Recent tax changes may make it costlier to earn income in a corporation from sales to other private corporations in which the seller or a non-arm’s length person has an interest. As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher taxed sales. Such a payment may reduce the total income taxed at higher rates.
- Proposed changes to the tax regime will likely require more careful tracking of an individual shareholder’s labour and capital contribution to the business, as well as risk assumed in respect of the business. Inputs should be tracked in a permanent file.
- If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the corporation as a Personal Services Business. There are significant negative tax implications of such a classification. In such scenarios, consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated employee) with your professional advisor.