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, 2013.
Employer
- Pay your arm’s length (non-related) employee non-cash tax-free gifts and awards with annual aggregate value up to $500.
- Pay your 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.
Employee
- Pay interest on employee loans before January 30, 2014 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, 2014 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.
Business
- 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, 2014.
- Purchase capital assets before fiscal year-end to accelerate the claim of capital cost allowance (depreciation).
Investment
- 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 2014 to avoid income inclusion in 2013 as many mutual funds distribute income and capital gains once a year, usually during December.
- Contribute to your TFSA and gift funds to your spouse or adult children for them to make a TFSA contribution.
- 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.
RRSP and Pension
- Make a contribution to your RRSP for 2013 tax year by March 3, 2014 (March 1, 2014 is a Saturday). Your 2012 Notice of Assessment shows your 2013 RRSP contribution limit.
- If you have excess funds, make your RRSP contribution for 2014 tax year as soon as after December 31, 2013 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 2013 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 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.
- Make your required Home Buyers’ Plan repayment by March 3, 2014 by making a regular contribution to your RRSP. Refer to your 2012 Notice of Assessment for the required repayment for 2013.
RRSP Strategies at Age 71
- Collapse/mature your RRSP (by purchasing an annuity or transferring to a RRIF etc.) by December 31, 2013 if you will turn or have turned 71 by the end of 2013. If you fail to do so, the plan will be cancelled at the beginning of 2014, and the full fair market value of all the assets in the plan would be included in your income for 2014… Ouch!!!
- Make final RRSP contribution to your own plan for your 2013 or 2014 taxation year before collapsing it if you have RRSP contribution room.
- After collapsing your RRSP in 2013, 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 2013 tax return… Nice!
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.
- A first-time donor’s super credit is new for 2013 and can be claimed once from the 2013 to 2017 taxation year. The super credit is 25% of monetary donations up to $1,000 on top of the regular donation credit. An individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed any donation credit in any of the five preceding tax years.
Family Trust
- 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.
RESP
- Contribute to your children’s RESP by December 31 to obtain the Canada Education Savings Grant (“CESG”) for 2013. 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.
Federal 2013 Budget and Tax Planning
- The Federal 2013 Budget increased the Lifetime Capital Gains Exemption (LCGE) room to $800,000 from $750,000 of capital gains realized on the disposition of qualified property, effective for the 2014 taxation year. The LCGE will also be indexed for taxation years after 2014. The timing of business sales should be considered in light of this change, particularly where there may be multiple exemptions available to family members on account of trusts.
BC 2013 Budget and Tax Planning
- BC 2013 Budget increased the top personal income tax bracket by approximately 2% for 2014 and 2015 for taxable income over $150,000. Individuals should take steps to avoid paying the higher rate by either deferring the receipt of taxable dividends or discretionary bonuses in 2014 and 2015 or alternatively accelerating the payment of such amounts to 2013.