The end of the 2018 is almost here and in addition to holiday preparations it is important to focus on year-end tax planning. As always, we would like to take this opportunity to provide you with some tips that you should consider.
2018 was a year of significant new tax increases introduced by the Federal and Provincial governments.
Taxation of private corporations
- “Income sprinkling” – Starting in 2018, “income sprinkling” (i.e. shifting income from a high-tax rate individual to low- or nil tax rate family members) has been restricted. Income sprinkling among all family members including adults is now subject to the “tax on split income” (TOSI) rules, which can cause income to be taxed at the top tax rate unless certain exceptions apply, the major one being the related family member providing significant contributions to the business (defined as minimum of 20 hours per week).
- Passive investments – For taxation years beginning after 2018, the $500,000 small business deduction (SBD) on active business income enjoyed by a Canadian-controlled private corporation (CCPC) and its associated CCPCs will be reduced by $5 for every $1 of passive investment income in excess of $50,000 earned in a previous year. As a result, the $500,000 SBD will be eliminated once the passive income reaches $150,000. For a CCPC with a December 31 year-end, these rules will be effective starting December 31, 2019 fiscal year, and the reduction of SBD will be calculated based on the passive income earned in the December 31, 2018 fiscal year.
- Passive investments – For taxation years beginning after 2018, a CCPC’s refundable dividend tax on hand (RDTOH) will be dividend into two pools – eligible RDTOH (ERDTOH) and non-eligible RDTOH (NRDTOH). Payment of eligible dividend (taxed at lower rates) will only enable a dividend refund of a CCPC’s ERDTOH balance. Payment of non-eligible dividend will enable a dividend refund of a CCPC’s ERDTOH or NRDTOH. Transitional rules will apply to the existing RDTOH balances and we will review planning opportunities to increase the ERDTOH on transition.
- Federal small business tax rate for CCPCs decreased from 10.5% to 10% on January 1, 2018 and will decrease to 9% on January 1, 2019, resulting in a combined Federal and BC tax rate of 12% for 2018 and 11% for 2019 (finally some good news).
- Incorporated or self-employed professional business (accountant, dentist, lawyer, medical doctor, veterinarian and chiropractor) can no longer elect to exclude work-in-progress (WIP) in computing income for taxation years beginning after March 21, 2017. To assist with the transition, business which had previously elected to value WIP at nil will gradually report their WIP over a five-year period.
Accelerated investment incentive – increased first year capital cost allowance deduction for eligible assets acquired after November 20, 2018 and available for use before 2028.
Immediate 100% CCA deduction for newly-acquired manufacturing and processing equipment acquired after November 20, 2018 and available for use before 2024.
BC Employer health tax (EHT) – Starting January 1, 2019, an EHT of up to 1.95% will apply to employers with payroll above $500,000 (the maximum rate of 1.95% will apply on total payroll of $1.5 million or more). This represents an increase in costs to many of our clients.
BC general property transfer tax – rate increased from 3% to 5% on the portion of a residential property’s fair market value above $3 million, for residential property transfers registered after February 20, 2018.
BC additional property transfer tax for foreign buyers – rate increased from 15% to 20% for residential property transfers registered after February 20, 2018 if the property is within specified areas of BC.
BC speculation and vacancy tax (SVT) – If you own residential property in certain areas of BC, starting 2018, you may be subject to the annual SVT. The tax rate, as a percentage of the property’s assessed value, will be:
- for 2018: 0.5% for all property owners subject to the tax;
- after 2018:
- foreign investors and satellite family (an individual or spousal unit where the majority of their total worldwide income for the year is not reported on a Canadian return): 2%;
- British Columbians and all other Canadian Citizens or permanent residents who are not members of a satellite family: 0.5%
Up-front exemptions are available for principal residence, qualifying long term rental properties and certain special cases. A tax credit may also be available.
- Federal top tax rate for taxable income over $205,842 is 33% for 2018. BC top tax rate on income over $150,000 is 16.80% for 2018. The 2018 combined top tax rate for BC taxpayers is 49.80%.
- Top tax rate on non-eligible dividends will increase to 44.64% in 2019 from 43.73% in 2018 for BC taxpayers.
- Top tax rate on eligible dividends will decrease to 31.44% in 2019 from 34.20% in 2018 for BC taxpayers.
Year End Tax Planning Ideas
As the end of the year approaches, it’s a good time to contemplate some planning ideas. Below, in no particular order, are some ideas and tips, which may be useful for you to consider before December 31, 2018.
Pay your arm’s length (non-related) employees non-cash tax-free gifts and awards with annual aggregate value up to $500 per employee.
Pay your arm’s length employees 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 per employee.
Pay interest on employee loans before January 30, 2019 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, 2019 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 by you. 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 28, 2019.
Purchase capital assets before fiscal year-end to accelerate the claim of capital cost allowance (depreciation).
Repay shareholder loans from your corporation no later than the end of the corporation’s tax year after the one in which the amount was borrowed, to avoid a personal income inclusion.
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 when “tax time” comes.
Delay mutual fund purchases until early 2019 to avoid income inclusion in 2018 as many mutual funds distribute income and capital gains once a year, usually during December.
Review your capital gain/loss position 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%.
Consider splitting the CPP income with your spouse by requesting to share the payments.
If you receive CPP benefits, you are employed or self-employed, and are age 65 to 70, you can elect to stop CPP contributions on your employment and self-employed earnings.
Should You Defer OAS
An individual can delay OAS pension for up to five years (to age 70) after the normal age 65 starting date 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. Deferral of the pension payments would be beneficial with no attached risk or cost for a person subject to a full OAS clawback.
RRSP and Pension
Make a contribution to your RRSP for 2018 tax year by March 1, 2019. Your 2017 Notice of Assessment shows your 2018 RRSP contribution limit.
If you have excess funds, make your RRSP contribution for 2019 tax year as soon as after December 31, 2018 as possible, to maximize the tax deferral of income earned in the plan. You can also make a one-time over-contribution of $2,000 to your RRSP. Watch for over-contribution in excess of $2,000 as penalties apply on the excess.
Withdraw RRSP funds by the end of year if your 2018 income is abnormally low.
Make your required Home Buyers’ Plan repayment by March 1, 2019 by making a regular contribution to your RRSP. Refer to your 2017 Notice of Assessment for the required repayment for 2018.
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 and don’t currently receive “pension income”. You’ll be entitled to claim federal non-refundable pension credit of $2,000 and BC non-refundable pension credit of $1,000.
If your RRIF investments declined in value and you think that the investments will rebound, consider an “in-kind” withdrawal (e.g. transfer to a non-registered investment account at your financial institution or a TFSA (subject to the contribution room available)) to satisfy the RRIF’s minimum withdrawal requirements.
RRSP Strategies at Age 71
Collapse/mature your RRSP (by purchasing an annuity or transferring to a RRIF etc.) by December 31, 2018 if you will turn or have turned 71 by the end of 2018. If you fail to do so, the plan will be cancelled at the beginning of 2019, and the full fair market value of all the assets in the plan would be included in your income for 2019… Ouch!!!
Make final RRSP contribution to your own plan for your 2018 or 2019 taxation year before collapsing it if you have RRSP contribution room.
After collapsing your RRSP in 2018, 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 2018 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. An unfriendly form, T1-OVP Individual Tax Return for RRSP Excess Contributions, will have to be completed within 90 days from the end of the year to calculate the amount of the over-contribution and penalty tax. Due to the complexity of the form, you usually need our help to complete it. Therefore, to avoid the penalty tax and the related accounting fees, please check your contribution room before making any contributions for the 2018 tax year. If dividend is your major source of income, your RRSP contribution room will be very limited. If you discover that you have over-contributed, you should withdraw the excess amount as soon as possible to prevent the penalty tax from being continually accrued.
Contribute to your TFSA and gift funds to your spouse or adult children for them to make a TFSA contribution. Contributions will not be deductible, but withdrawals and income earned in the TFSA will not be taxable.
The annual contribution room: 2009 to 2012 – $5,000; 2013 to 2014 – $5,500; 2015 -$10,000; 2016 to 2018 – $5,500 (increasing to $6,000 in 2019). For individuals who have never contributed into a TFSA, and were at least 18 years of age in 2009, you would be able to contribute up to a maximum of $57,500 in 2018.
If you are planning a withdrawal from your TFSA, consider doing so before the end of 2018 instead of early 2019 – amounts withdrawn are not added to your TFSA contribution room until the beginning of the year following the withdrawal.
Contribute to your children’s RESP by December 31 to obtain the Canada Education Savings Grant (“CESG”) for 2018. 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.
Apply for BC training and education savings grant ($1,200 for a RESP beneficiary born after 2005) before deadline (varies depending on birth date).
Canada Child Benefit
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. Be mindful of the new TOSI rules which will affect this strategy.
Loans to family members
If you have cash to invest and a spouse or children in a lower tax bracket, consider an income-splitting plan by arranging a loan to a family member to take advantage of the current low prescribed rate of 2%. Interest on intra-family loans must be paid on or before January 30, 2019 to avoid attribution of income.
Deductions and credits
Pay amounts eligible for deduction or credit 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.
Please contact us for a deeper discussion of how you can benefit from the above materials.