December 2, 2015
Who has time to think about anything with the holiday season looming and everyone getting preparations ready, attending parties, and worrying about the shopping rush. But if saving taxes is something that appeals to you, then you have one more thing to add to your to-do-list. Here are some simple tips to consider that just might make that other joyful season – tax time – a little bit better.
Registered Retirement Savings Plans (RRSPs)
Making a contribution to your RRSP is one of the most known and used methods of reducing income tax. Contributions must be made by February 29, 2016 to be deducted on your 2015 tax return; unless you turned 71 during 2015, in which case you only have until December 31, 2015. The amount you can contribute is based upon your maximum RRSP contribution room. This limit can be found on your last notice of (re)assessment. RRSP contributions made do not have to be deducted in the current year and can be carried forward to deduct in future years. Therefore, if you will have higher income in future years, it may make sense to consider forgoing the immediate tax savings now and deducting these RRSP contributions against future income that will be reported in higher tax brackets. This will result in higher overall tax savings.
Registered Retirement Income Funds (RRIFs)
Taxpayers that have a RRIF are required to withdraw a minimum amount every year. However, there were changes to the calculated minimum withdrawal amounts and these changes became effective for the 2015 year. Therefore, if the amount you withdrew from your RRIF was based upon pre-2015 withdrawal calculations, you can return any excess funds that were withdrawn to your RRIF. The deadline to return the excess amount to your RRIF is February 29, 2016.
Keep your receipts
There are many allowable tax deductions and credits that you should consider taking advantage of to minimize your income taxes. However, most of these require supporting documentation in order to be able to claim. Some of these include medical expenses, charitable donations, children’s fitness and arts/culture activities, child care, union dues, moving costs, and employment related expenses. Many of these listed items are only claimable when they are paid, and not when the expenditure is incurred. For example, if you are having significant non-cosmetic dental work that will be occurring in 2016, you may consider prepaying these expenses in 2015 to be able to claim the expense on your 2015 tax return.
Each of the items listed above have their own specific criteria which allow them to be claimed, and we would be pleased to discuss these with you.
Capital gain and loss planning
If you have realized a capital gain in 2015 or in any of the last three years, you may want to consider minimizing the taxes on this income by triggering allowable capital losses. Allowable capital losses are only eligible to reduce income reported from capital gains. These losses may be claimed against capital gains in the current year, carried back and applied to capital gains reported in the past three years, or may be carried forward indefinitely.
Therefore, if you have investments in your portfolio that are valued at less than their cost, you could trigger these losses before the end of the year and use these losses to reduce any gains in the current year, or last three years and reduce or recover taxes.
Of course, you should always evaluate whether it makes sense from an investment perspective before you sell any security. Also, there are rules that will disallow losses on the sale of a security where you or a person affiliated to you acquires the same securities within 30 days either before or after the sale date. And lastly, the sale is deemed to occur at the settlement date, which is usually 2-3 days after the trade date. Therefore, plan the timing of any last minute security transactions appropriately to ensure that it occurs in the 2015 taxation year.
Salary or dividend compensation
If you are the shareholder of an owner/managed business, then you should consider looking at your remuneration for 2015. Salary and bonus will reduce the taxable income of your company and will also provide you with earned income that will contribute towards the allowable contributions to your RRSP. For 2015, a salary/bonus of $140,945 is required to maximize the 2016 RRSP contribution. Therefore, you may want to pay a bonus to ensure that you will reach this maximum level.
Dividend income is taxable to the shareholder at a reduced personal tax rate because you can claim the dividend tax credit. However, dividends do not reduce the company’s taxes and personally this income is not treated as earned income and do not add RRSP contribution room. Dividend income also does not count as pensionable earnings for the Canada Pension Plan (CPP). So while there are no CPP premiums on this income, there also is no increase to any CPP benefit (retirement or disability) that you would be entitled to receive in the future.
Manage the timing of income if possible
One of the newly elected Liberal Government’s election promises was a reduction of taxes for the middle class and the introduction of a new top bracket. Therefore it is expected that for the 2016 tax year there will be a new top federal tax bracket for income over $200,000 which will be taxed at an additional 4% over the current top tax rates. If you have income over the top tax bracket for this year (which in NS is currently $150,000) and you anticipate you will have income over $200,000 in 2016, you may consider trying to accelerate the reporting of any discretionary income. Examples where this may apply is bonuses or dividends from your owner/managed business, retiring allowances or severance payments that you control the timing of the payment, or planned RRSP/RRIF withdrawals. By claiming this income in 2015, you can potentially save 4% in taxes.
Structuring your loans for interest deductibility
You may deduct interest on loans made for the purpose of earning business or investment income. With this in mind, you should consider structuring your financial affairs so that whenever possible you are borrowing for investment purposes rather than for personal purposes. You should also consider making repayments on personal loans first as the interest on these loans is non-deductible. You may also be able to convert non-deductible loans into deductible loans in certain situations. For example, you could sell an investment asset and use the proceeds to repay a non-deductible loan. Then you can enter into a new loan and use the funds to repurchase a new investment asset. Always be mindful of possible tax implications of selling and rebuying investments before implementing this planning. Please consult an advisor from our office to assist you.
Spousal loans/investment planning
In situations where one spouse earns more income than the other spouse, consideration should be made to shift investment income to the lower earning spouse. One simple option would be for the spouse with the higher income to pay for all or a majority of the household expenses, while the lower earning spouse invests their after tax earnings. By doing this, the income earned on the investment income would be reported fully in the tax return of the lower income spouse and subject to tax at lower tax rates.
Another more involved option is called a spousal loan. The higher earning spouse provides a loan to the other spouse which is used for investment purposes. This investment income will be taxed at the lower tax brackets. However, to ensure that this plan does not fall offside of income attribution rules, interest will need to be paid on this spousal loan. The interest rate must be at least at the Canada Revenue Agency’s prescribed interest rate which is currently 1% per year. The interest rate for the loan will remain at the rate that was in effect at the time the loan was granted. It is important that this interest be calculated for the year and actually must be paid by January 30 of the following year. The interest on this loan will be included into the income of the higher earning spouse and can be deducted from the income of the lower earning spouse. This plan works very well in families with one income and where the return on the investment will exceed the prescribed rate.
For 2015, there are income splitting measures in place for certain taxpayers collecting qualifying pension and retirement income, which does not include Canada Pension Plan or Old Age Security benefits. As well, families with children under the age of 18 may also be able to reduce their overall taxes. The principle which allows either of these measures to work is where one spouse is at a lower tax bracket than the other. Both of these tax planning measures do not require anything to be done in advance and are simply applied as part of filing the annual tax returns for the couple.
As noted, CPP is not eligible for pension splitting on your tax return. However, there is an ability to split your CPP benefits with your spouse. To take advantage of this income splitting opportunity, you and your spouse must be 60 years of age or older. You must contact Service Canada to request the splitting of the benefit. Unlike the pension splitting discussed above, this planning will actually affect the monthly benefit payment each spouse receives.
a PDF copy is available HERE
Written by Earl MacLeod, CPA, CA, Partner, WBLI Chartered Professional Accountants, Dartmouth, NS