It is hard to believe that the end of the year has already arrived. Looking back to 2015 and forward to 2016 we would like to take this opportunity to provide you with some “year-end” tax planning tips that you should consider before immersing into the holiday cheer.
Key tax changes by the new Federal Liberal government:
- increase the top federal tax rate on income over $200,000 from 29% to 33% (effective 2016), which equates to a combined Federal/BC rate of 47.7%… Ouch!
- decrease the middle federal income tax rate from 22% to 20.5% (effective 2016).
- roll back the $10,000 TFSA contribution limit to $5,500 (effective 2016 with 2015 limit remaining at $10,000).
- eliminate the family tax cut credit which has a saving of $2,000 for families with children under 18 years of age.
Reduce the small business rate from 11% to 9% over four years starting 2016.
Commencing 2015, the minimum annual withdrawal amount for RRIF holders age 71 to 94 has been reduced. RRIF holders who have already withdrawn more than the 2015 minimum amount can re-contribute the excess until February 29, 2016, and deduct it on their 2015 tax return.
The maximum child care expenses per child will increase by $1,000 starting 2015 – maximum claim will be $8,000 for child under 7, $5,000 for child aged 7 to 16, and $11,000 for child eligible for the disability tax credit.
Children’s fitness tax credit on up to $1,000 fees paid per child under 17 will be a refundable tax credit commencing 2015.
For 2015 and beyond, foreign property with cost less than $250,000 throughout the year will be allowed to use the streamlining information reporting.
BC tax rate on income over $151,050 will decrease from 16.8% to 14.7% after 2015. However, as noted above, the increase in the top tax rate by the Federal Liberal party will actually cause the combined Federal/BC top tax rate to increase from what would have been 43.7% to 47.7% effective January 2016.
BC Children’s fitness equipment tax credit is available for 2015 and beyond. This credit provides a non-refundable tax credit equal to 50% of the child fitness credit with a maximum benefit of $12.65 per child.
Starting 2016, Federal home accessibility tax credit for eligible expenditures up to $10,000 (i.e. non-refundable tax credit up to $1,500) will be available. Eligible expenditures are home renovations to increase the mobility or safety of a senior or an individual who qualifies for the disability tax credit.
Beginning in 2016, testamentary trusts will no longer benefit from lower graduated tax rate and a non-calendar yearend. All existing testamentary trusts with non-calendar yearend will have to convert to calendar yearend on December 31, 2015.
After 2016, an exemption of capital gains tax on the disposition of private corporation shares or Canadian real estate will be available if the cash proceeds are donated to a charity.
Year End Tax Planning Ideas
As the end of the year approaches, now is a good time to contemplate and act upon some planning ideas before December 31, 2015.
Pay arm’s length (non-related) employee non-cash tax-free gifts and awards with annual aggregate value up to $500.
Pay arm’s length employee a separate non-cash long term service/anniversary award (at least five years of service and at least five years since the last long service/anniversary award) on a tax-free basis for a total value up to $500.
Pay interest on employee loans before January 30, 2016 to reduce the taxable employment benefit if you had a low-interest loan from your employer during any part of the year.
Reimburse personal operating costs on employer-provided automobiles before February 14, 2016 to reduce the taxable operating benefit.
Review your personal use of employer-provided automobiles and your automobile log to determine if you’re close to the thresholds for the reduced standby charge benefit (total personal driving less than 20,000 kilometers and less than 50% of total use). If so, you may want to reduce personal travel with the company car where possible between now and the end of the year, to reduce your taxable benefits.
If you intend to use the alternate method of 50% of the standby charge for calculating the operating benefit, you must advise your employer in writing by December 31.
Pay reasonable salaries to family members (e.g. spouse or children) before year-end if they are employed. A good rule of thumb of being “reasonable” is to pay them what you would have paid a third party. A record should be kept of the time actually spent and the services actually performed. Ensure applicable payroll source deductions are remitted as required and the salary/source deductions are reported on T4 slips, due on or before February 29, 2016.
Purchase capital assets before fiscal year-end to accelerate the claim of capital cost allowance (depreciation).
Review your outstanding debt and take note of which debt is deductible for income tax purposes (usually loans used for business purposes and to earn interest and dividends from investments). Ensure to take copies of loan statements so your interest expense claims are readily available come “tax time”.
Delay mutual fund purchases until early 2016 to avoid income inclusion in 2015 as many mutual funds distribute income and capital gains once a year, usually during December.
Review capital gain/loss positions for the year and consider selling investments with accrued losses by mid-December to reduce/offset capital gains already realized. Watch for the “superficial” loss rule, which can deny certain losses.
If you are age 60 to 70, determine the best time to start receiving CPP benefits. By deferring CPP from age 60 to 70, the annual CPP benefit could be more than doubled. By deferring CPP from age 65 to 70, the annual CPP benefit could increase by 42%. A general rule of thumb is to defer your CPP if you don’t need the money.
Should You Defer OAS
An individual can delay OAS pension for up to five years (to age 70) and be compensated for the shorter payment period by receiving a higher monthly amount later. The monthly payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70.
RRSP and Pension
Make a contribution to your RRSP for 2015 tax year by February 29, 2016. Your 2014 Notice of Assessment shows your 2015 RRSP contribution limit.
Withdraw RRSP funds by the end of year if your 2015 income is abnormally low.
Purchase an annuity or transfer part of your RRSP plan to a RRIF to create an annual “pension income” of $2,000 if you’re 65 or over so you are entitled to claim federal non-refundable pension credit of $2,000 and BC non-refundable pension credit of $1,000 when preparing your 2015 income tax return.
Make your required Home Buyers’ Plan repayment by February 29, 2016 by making a regular contribution to your RRSP. Refer to your 2014 Notice of Assessment for the required repayment for 2015.
RRSP Strategies at Age 71
Collapse/mature your RRSP (by purchasing an annuity or transferring to a RRIF etc.) by December 31, 2015 if you will turn or have turned 71 by the end of 2015. If you fail to do so, the plan will be cancelled at the beginning of 2016, and the full fair market value of all the assets in the plan would be included in your income for 2016… Ouch!!!
Make final RRSP contribution to your own plan for your 2015 or 2016 taxation year before collapsing it if you have RRSP contribution room.
After collapsing your RRSP in 2015, if your spouse is younger, and you have unused RRSP contribution room, you can contribute to your spouse’s RRSP up to and including the year in which your spouse reaches 71. You will get the RRSP deduction in your 2015 tax return… Nice!
Before contributing to your RRSP, please confirm your RRSP contribution room to avoid unpleasant surprises. You are allowed to make contribution of up to $2,000 over your contribution room without being penalized. However, you have to pay a tax of 1% per month on over-contribution in excess of $2,000.
Contribute to your TFSA and gift funds to your spouse or adult children for them to make a TFSA contribution. Contributions will not be tax deductible, but withdrawals and income earned in the TFSA will not be taxable.
Annual contribution room: 2009 to 2012 – $5,000; 2013 to 2014 – $5,500; 2015 -$10,000. For individuals who have never contributed into a TFSA, and were at least 18 years of age in 2009, you are able to contribute up to a maximum of $41,000 in 2015.
Contribute to your children’s RESP by December 31 to obtain the Canada Education Savings Grant (“CESG”) for 2015. The annual CESG per beneficiary is $500, i.e. 20% on first $2,500 contribution.
If the plan has unused CESG room carried forward from prior years, additional contributions can be made to obtain the missed CESG up to another $500 per year on $2,500 contribution. The lifetime CESG limit per beneficiary is $7,200.
The CESG is available up to the end of the year in which the beneficiary turns 17. Beneficiaries aged
16 and 17, however, are only eligible to receive the CESG if certain prior year contribution conditions are met. An additional CESG is available to contributions made by low and middle-income families.
Universal Child Care Benefit (UCCB)
Starting 2015, monthly UCCB increased by $60 per child under 18 years of age. As a result, parents should have received $1,920 per year for each child under the age of 6, and $720 per year for each child aged 6 through 17. If you are eligible and have not received the UCCB, file the Canada Child Benefits Application (Form RC66). However, please note that the new Federal Liberal Government may replace the UCCB, CCTB and National Child Benefit Supplementary with a New Canada Child Benefit that is income-tested and tax free.
If you have received these benefits, invest the funds in an account in trust for your children. Investment income on these funds will not be taxable to you.
Review the income, deduction and credit positions of the beneficiaries of your family trust to plan for their income from the trust. Ensure that the trust receives income from your company by December 31 and the income is either paid or payable to beneficiaries by trust by December 31 otherwise the income will be taxed in the trust at the highest marginal rate.
Deductions and Credits
Pay amounts such as alimony, investment counsel fees, professional dues, charitable donations, medical expenses and political contributions by December 31 in order to be creditable or deductible for tax purposes.
Donate certain publicly-traded shares or mutual fund units to a charity. If you do this, you do not report any taxable capital gain on the securities, however the donation is valued for tax purposes at its current fair market value.
If you have any questions as to how these measures could impact you, please do not hesitate to contact us.