Another year is almost over. As always, we would like to take this opportunity to provide you with some “year-end” tax planning tips that you should consider.
New for 2016
Canadian-Controlled Private Corporations (CCPCs)
- The “Small business” tax rate for CCPCs decreased to a combined Federal and BC rate of 13%. Since the highest personal tax rate is almost 48%, there is a significant tax deferral if surplus funds remain within a company for reinvestment.
- Tax on investment income for CCPC increased to a combined Federal and BC tax rate of 49.67%. However, since the refundable portion (based on dividends paid to individuals) increased to 30.67% the net tax rate applicable to investment income is 19%.
- The combined Federal and BC top personal tax rate on salaries and investment income (other than dividends from Canadian corporations) is 47.7%… Ouch! Surplus funds generated by a business should remain in the company to defer the tax.
- The disposition of a principal residence must be reported in tax return for the sale to be tax free, commencing 2016.
- The family tax cut credit, which had a maximum savings of $2,000 for families with children under 18 years of age, has been eliminated… Those bastards!
- Children’s fitness tax credit on up to $500 fees paid per child under 17 is now a refundable tax credit for 2016 and is eliminated for 2017 onwards.
- Children’s arts tax credit – this is the last year for a non-refundable tax credit on up to $250 fees paid per child under 17.
- Canada Child Benefit – Starting July 2016, this non-taxable monthly benefit, which is based on adjusted family net income and the number of children in the family, replaced the Universal Child Care Benefit, Canada Child Tax Benefit and National Child Benefit. Families with children under the age of 6 will receive an annual tax-free benefit of up to $6,400 per child. Those with children between the ages of 6 and 17 will receive up to $5,400 annually. Households with children with annual income below $30,000 will receive the maximum payment.
- For 2016 and subsequent tax years, Federal home accessibility tax credit for eligible expenditures up to $10,000 is available. Eligible expenditures are those that increase the mobility or safety of a senior or an individual who qualifies for the disability tax credit.
- The federal education and textbook tax credits for students are eliminated commencing 2017. However, unused credits can be carried forward for use after 2016.
Year End Tax Planning Strategies
As the end of the year approaches, here are some ideas and tips which may be useful for you to do before December 31, 2016.
- Pay arm’s length (non-related) employees non-cash tax-free gifts and awards with annual aggregate value up to $500.
- Pay 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) up to $500.
- Pay interest on loans before January 30, 2017 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, 2017 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 your business. Ensure applicable payroll source deductions are remitted as required. The salary/source deductions must be reported on T4 slips, due on or before February 28, 2017.
- Purchase capital assets before fiscal year-end to accelerate the claim of capital cost allowance (depreciation).
- Repay shareholder loans owing to your corporation no later than the end of the corporation’s tax year following the year in which the amount was borrowed, to avoid a personal income inclusion.
- Review your outstanding debt and take note of what 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 2017 to avoid income inclusion in 2016 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%. This can be significant!
- 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.
- 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 should be beneficial with no attached risk or cost for a person subject to a full OAS clawback… Again, this can be significant!
RRSP and Pension
- Contribute to your RRSP for 2016 tax year by March 1, 2017. Your 2015 Notice of Assessment shows your 2016 RRSP contribution limit.
- Withdraw RRSP funds by the end of year if your 2016 income is abnormally low (less than $32,000).
- Make your required Home Buyers’ Plan repayment by March 1, 2017 by making a regular contribution to your RRSP. Refer to your 2015 Notice of Assessment for the required repayment for 2016.
- Purchase an annuity or transfer part of your RRSP plan to a RRIF to create an annual “pension income” of $2,000 if you are 65 or over and don’t currently receive “pension income”. You will be entitled to claim federal non-refundable pension credit of $2,000 and BC non-refundable pension credit of $1,000.
RRSP Strategies at Age 71
- Collapse/mature your RRSP (by purchasing an annuity or transferring to a RRIF etc.) by December 31, 2016 if you will turn or have turned 71 by the end of 2016. If you fail to do so, the plan will be cancelled at the beginning of 2017, and the full fair market value of all the assets in the plan would be included in your income for 2017… Ouch!!!
- Make final RRSP contribution to your own plan for your 2016 or 2017 taxation year before collapsing it if you have RRSP contribution room.
- After collapsing your RRSP in 2016, 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 2016 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 deductible for tax purposes, but withdrawals and income earned in the TFSA will not be taxable.
- The annual contribution room: 2009 to 2012 – $5,000 per year; 2013 to 2014 – $5,500; 2015 -$10,000; 2016 – $5,500. 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 $46,500 in 2016.
- If you are planning a withdrawal from your TFSA, consider doing so before the end of 2016 instead of early 2017 – 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 2016. 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) and 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 paid or payable to beneficiaries by trust by December 31 otherwise the income will be taxed in the trust at the highest marginal rate.
- 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 1%. Interest on intra-family loans must be paid on or before January 30, 2017 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.
For a deeper discussion of how you can benefit from the materials, please contact A-R Partners at 604-444-0344.