If you are a taxpayer in Canada, the following general information may be helpful to you. It does not exhaust all tax-related issues that needed to be dealt with before December 31 or may not be applicable to you at all. Please note that this information is not professional advice to your particular situation. Neither Taxwiz Accounting nor the author assumes any responsibility or liability to any persons relying on the information in this article to perform tax planning and/or compliance of any kind. Readers should use this information with caution and should seek professional advice before using it. All rights reserved.
The following suggestions may create tax-saving opportunities:
Defer taxable income by:
delay selling non-RRSP investments such as rental property, equity-based mutual funds or stock that have appreciated in value, hence not realizing taxable capital gains (note that the investment market conditions should be the dominant decision factor);
staggering the income inclusion on capital gain over up to 5 years if you allow the buyer to stagger payments of the sale proceeds over a 5-year period (the term is increased to 10 years for the transfer of farm property, shares from a family farm corporation, or from a small business corporation when this transfer is carried out in favour of a child, grandchild, or great-grandchild living in Canada);
timing and electing wisely to exclude income from work in progress pursuant to Section 34 (the professional business method) of the Income Tax Act if you are carrying on a business, either in form of a corporation, sole proprietorship or partnership, that is the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor; while an election in a late return is acceptable, such election filed with an amended tax return is invalid;
deferring tax on stock option benefits if you exercise stock options this year on publicly traded shares and keep these shares until December 31 (you have to notify your employer before next January 15 to exclude this income in your current year T4).
Reduce taxable income by:
Incur deductible expenses on or before December 31:
purchase necessary capital properties (such as business equipment, computers, vehicles, commercial real estate) and other eligible goods/services used in your business;
writing off aged account receivables and doubtful accounts;
declare payments of salary/commission/bonus/director fees to those who contributed to your business;
if you have used company cars for personal use, you may wish to repay the automobile benefits to your company within 45 days after the calendar year end to prevent automobile benefits to be taxed as personal income;
give your employees non-cash gifts (excluding gift certificates) not exceeding 2 items valued $500.00 in total;
donate the desired amount to registered charity (note that only donations to registered charities are income tax deductible in Canada) and/or political parties of your liking, pay eligible investment counsel fees;
buy the necessary medical supplies (such as prescribed drugs and eyeglass, guide dogs and hearing aids) and services (dental, nursing, surgeries not covered by any insurance plans and out-of-pocket premiums to extended health care plan) for you and your family members to a minimum of 3% of your net income or a threshold determined by CRA each year, whichever is smaller;
repay loans borrowed from your own corporation to avoid being attributed as income;
If you are a shareholder or creditor of a defunct private corporation, consider disposing your shares or writing off the debt before December 31 to realize an Allowable Business Investment Loss (ABIL) before the end of the year. An ABIL, amounts to 50% of the total loss resulted, can be used to reduce income from all sources. However, if you have already claimed a capital gains exemption in the past, the amount of the ABIL is reduced by the claimed amount, time your claims and exemptions carefully.
Claim the $500,000 capital gains deduction from small business corporation shares and qualified farm property. If you have claimed part or all of the abolished $100,000 personal capital gains deduction before or have claimed an ABIL in prior years or have cumulative net investment losses (CNILs) as at December 31, it is possible that you will not be able to claim the full deduction.
Realize capital losses to offset capital gain and beware of:
the issue of superficial loss which could disqualify the claim of capital loss if you, or a person affiliated with you, buys, or has a right to buy, the same property during the period starting 30 days before the sale and ending 30 days after the sale);
the settlement of the trade must take place before the last stock trading date of the year.
Be careful with the Alternative Minimum Tax (AMT)
Sometimes claiming certain deductions may inadvertently trigger AMT when minimum tax payable exceeds federal basic tax. Originally designed to disallow high-income taxpayers to use legal deductions and tax loopholes to substantially reduce their tax bill, the AMT is now increasingly affecting the middle class as carrying charges, capital cost allowance and capital gain exemption are frequently used to reduce taxable income. If you have investment income exceeding $40,000 and you are claiming tax preferences, seek professional advice.
Top up your R.R.S.P. to your current deduction limit before February 28 next year:
To those who have a spouse, they may want to consider splitting retirement income by way of spousal RRSP.
If you turn 71 (previously 69) on or before December 31 this year, you must convert your RRSP to a RRIF or annuitize your RRSP by December 31. It is important to take early action before the deadline. If you do not make a decision as to how you wish to receive your retirement income by December 31, the full market value of your RRSP will be added to your taxable income next year.
If you turn 71 in this year, you can make a final RRSP contribution prior to conversion to RRIF. If you have earned income this year, you could contribute 18% of your earned income in addition to your RRSP contribution limit. After you turn 71, you can also contribute to a spousal RRSP if you have earned income and your spouse is not yet 71.
If you are 70 or 71 and have converted your RRSP to a RIF as required by law when you turned 69, you may transfer the assets back to an RSP as long as you convert it back to a RIF by the end of the year in which you turn 71.
If you have a RIF, the minimum RIF withdrawal rule is waived for 2007 (if you are 71 years old in 2007) and for 2007 and 2008 (if you are 70 years old in 2007).
Top up Registered Education Savings Plan (RESP) contributions for eligible beneficiaries before December 31 to obtain the current year Canada Education Savings Grant (up to an annual maximum of $500). The annual RESP contribution limit of $4,000 has been eliminated and the lifetime limit has been raised from $42,000 to $50,000. To those who have a budget constraint, it is important to weigh the benefit of the grant and of the tax-saving from buying RRSP to determine an optimal mix of RESP and RRSP.
Current Year New Tax Issues and Economic/Political Developments
The accelerated capital cost allowance (CCA) for eligible computers announced in the 2009 budget allows businesses to claim 100% (CCA Class 52) of computer costs (including systems software) purchased after 27 January 2009 and before midnight, 31 January 2011.
The corporation net tax rate will decrease as follows:
18% effective January 1, 2010;
16.5% effective January 1, 2011;
15% effective January 1, 2012.
You can claim an amount of $5,000 for the Home Buyers' Tax Credit (HBTC) if both of the following apply:
you or your spouse or common-law partner acquired a qualifying home after January 27, 2009, (closing after this date); and
you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer).
You do not have to be a first-time home buyer if you are eligible for the disability amount or you acquire a qualifying home for the benefit of a related person who is eligible for the disability amount.
Tax-free savings account (TFSA) will be available in 2009. You may earn tax free investment return from a maximum of $5,000 contribution per year in TFSA. This new account has the following features:
The $5,000 annual contribution limit will be indexed to inflation in $500 increments, starting in 2010.
You can carry forward unused contribution room indefinitely.
You can hold more than one TFSA, subject to your contribution limit.
Higher income spouse can give funds to the lower income spouse to establish his or her own TFSA. The normal income attribution rules that tax the investment income in the hands of the giver (usually higher income spouse) do not apply.
Like an RRSP, interest on funds borrowed and fees incurred to invest in a TFSA are not tax-deductible.
Unlike an RRSP, which has to be wound up when you reach age 71, you can maintain your TFSA for your entire lifetime and a TFSA can be used as collateral for a loan.
If you become non- tax resident, you can maintain your existing TFSA and your investment income and withdrawals will remain exempt from Canadian tax. However, while you are non-resident, no new contribution room will accrue.
Despite the assurance of a relatively healthy economy from politicians, the global financial tsunami is far from over. The worst hit is expected to be in next summer or autumn. Most businesses should be prepared for a decline in revenue and should ensure liquidity to meet current liabilities. It is disturbing to see that politicians in Ottawa are more interested in pursuing power than the best interests of Canadians, especially when wise and strong leadership is much needed to mitigate impacts of the financial crisis.
Interest rate next year may reach a record low in the last 50 years. Those who have an open and floating rate mortgage should watch for the best mortgage rate to lock in.
GST rate will be reduced from 6% to 5% effective January 1, 2008.
Public transit tax credit will be extended to innovative fare products like electronic fare cards and weekly passes when used on an ongoing basis.
The lifetime capital gains exemption for farmers, fishermen, and small business owners from $500,000 to $750,000.
The value of goods that may be imported duty- and tax-free by returning Canadian residents after a 48-hour absence has been increased from $200 to $400.
To combat obesity and to promote health of children, a $500 children’s fitness tax credit amount will apply in 2007.
Effective January 1, 2006, the federal gross-up and dividend tax credit has been increased to the equivalent of 45% (from 25%) and 27.5% (from 16.7%) respectively for dividends paid from income not subject to the small business active income tax rates.
The 25% capital gain income inclusion from donating eligible securities to charities was eliminated on or after May 2, 2006.
Effective July 1, 2006, a new transit pass credit applies to the purchase of monthly (or longer duration) public transit passes. Proofs of purchase such as receipts and the monthly transit passes may be required in the event of a tax audit or when filing your personal income tax return.
Taxpayers earning employment income are entitled to claim a new employment credit of $250 in 2006 ( this credit will be raised to $1,000 in 2007).
The maximum amount of pension income that qualifies for pension income credit has been increased to $2,000 (from $1,000 previously).
[added on 5 December 2006]
[This page was added on 18 December 2010 and last revised on 18 December 2010.]
