Year-End Tax Planning
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- 2. This presentation Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant. The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents. Although we have tried to ensure the accuracy of this information, tax laws change frequently so the provisions and exemptions mentioned in this presentation may change. Investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm) and Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund. ™ Trademarks owned by IGM Financial Inc. and licensed to its subsidiary corporations. 2
- 3. The importance oftax planning Top marginal tax rates for 2012 Alberta 39.0% British Columbia 43.7 Manitoba 46.4 New Brunswick 43.3 Newfoundland and Labrador 42.3 Northwest Territories 43.1 Nova Scotia 50.0 Nunavut 40.5 Ontario 48.0 PEI 47.4 Quebec 48.2 Saskatchewan 44.0 Yukon 42.4 3
- 4. The importance oftax planning Individuals are taxed on a calendar year basis Good tax planning is a year-round activity Human nature = procrastination Year-end provides motivation 4
- 5. Capital gains andlosses Consider selling investments with accrued capital losses before year-end if you have capital gains Net capital losses can be carried back 3 years or carried forward indefinitely to offset past or future capital gains Capital gain/loss inclusion rate has been 50% since 2001 5
- 6. Superficial losses 30 days before Disposition 30 days after A superficial loss is deemed to be nil and will not be deductible Amount of superficial loss is added to the ACB of the substituted property There is no “superficial gain” rule 6
- 7. Registered Retirement SavingsPlan (RRSP) contributions Deadline for 2012 RRSP contribution is March 1, 2013 Generally two cases where it can be advantageous from a tax perspective to make RRSP contribution by December 31: Contributing to a spousal RSP Contributor turns 71 years of age in 2012 Consider deferring the deduction of RRSP contribution to a future year when the individual is in a higher tax bracket 7
- 8. Spousal RRSP contributions Valuable planning tool despite pension income splitting rules Attribution rules can make withdrawals taxable in the hands of the contributor Must be no contributions to a spousal RRSP in the year of withdrawal or previous two years to avoid attribution rules Tip Contributing to a spousal RRSP before the end of the current year rather than waiting until the first 60 days of the following year cuts the three year attribution period by one year. 8
- 9. RRSP Contributions inthe year you turn 71 RRSP must be wound-up by December 31st of the year an individual turns 71 years of age Spousal RRSP contributions can be made after 71 if the contributor spouse has RRSP room and the annuitant spouse is 71 or younger No contributions to an RRSP are allowed beyond this date Tips If you have unused RRSP contribution room for 2012, contribute before the end of the year If you are receiving earned income in 2012, contribute for 2013 by December 31st of 2012 9
- 10. Registered Retirement SavingsPlans Tax Tips for the Home Buyers’ Plan (HBP) Individuals contemplating a withdrawal under HBP may wish to delay participation until after December 31, 2012 to obtain the following advantages: - Extended time period for purchasing a new home - Extended time period for first repayment by an additional year - Allows an increased period in which multiple withdrawals can be made If HBP withdrawal are made in 2012, ensure all withdrawals are made by December 31st 2012. 10
- 11. Registered Education SavingsPlan (RESP) Maximize the Canada Education Savings Grant (CESG) for all eligible children by December 31 If your child turns 15 this year, be sure that by December 31 of this year, an RESP for the child has received either: At least $2,000, or At least $100 in any 4 calendar years. Otherwise, the child is ineligible for the CESG in the years he or she turns 16 and 17. If your child turns 17 or younger this year, contribute what you need to collect your full CESG entitlement for the year 11
- 12. Tax-Free Savings Account(TFSA) Tax tips for a TFSA If planning on using current non-registered investments to contribute to a TFSA - trigger capital losses before the end of the year - Wait at least 30 days prior to repurchasing the asset Make withdrawals before end of year instead of early next year 12
- 13. Tax-Free Savings Account(TFSA) Common Issues Transfers of existing TFSAs - Transfer assets directly from existing TFSA to another TFSA – Do not withdraw from one TFSA and then re-contribute to another in the same year – If a direct transfer is not done, an over-contribution will be created Death of the account holder - Spouse-named beneficiary – Direct transfer to surviving spouse’s TFSA or – Contribution of TFSA proceeds at death to surviving spouse’s TFSA – Must be made by December 31st of the year following death - Form RC240 must be filed in either situation 13
- 14. Pay tax-advantaged amountsby year-end Individuals are taxed on a calendar year basis Amounts eligible for tax deductions or credits can generally only be claimed if paid in the year Ensure any amount eligible for tax-advantaged treatment is paid by December 31st 14
- 15. Items claimed inthe year they are paid Tax deductions Alimony and maintenance Child care expenses Interest, investment counsel and other investment expenses Safety deposit box rental fees Moving expenses Tradesperson tool expense Tax credits Charitable donations Medical expenses Political contributions Tuition fees Pension Income Credit Children’s Fitness & Arts tax credits 15
- 16. Items claimed inthe year they are paid Charitable donations Tips Amount Federal Provincial Consider combining Tax Tax charitable donations made Credit Credit* by each spouse first $200 15% lowest Consider combining tax rate donations into one year over $200 29% highest Carry-forward any unused tax rate charitable donations for up * Except in Alberta to five years Instead of donating cash, consider “gifts in kind” 16
- 17. Tax Credits Charitable donations – “Gifts in kind” Since May 1, 2006 capital gain inclusion rate is 0% for gifts of qualifying securities Qualifying securities include: - Publically traded securities, and - mutual funds Tip Due to reduced capital gains inclusion rate, consider “Gifts in kind” donations rather than cash donations 17
- 18. Tax Credits Politicaldonations Contributions to federal political Federal parties and to candidates in Tax Credit federal election campaigns qualify Amount Contributions to federal leadership First $400 75% campaign are not eligible Next $350 50% Many provinces also have credits Next $525 33.33% for contributions to provincial parties and candidates Over $1,275 0% Tip * Maximum federal credit = $650 Do not donate more than $400 per year per person 18
- 19. Items claimed inthe year they are paid Medical expenses Federal credit is based on qualifying medical expenses in excess of the lesser of: - $2,109 - 3% of net income A common misconception is that medical expenses must be claimed on a calendar year basis Tips Claim the medical expenses for the most advantageous 12 month period ending in the tax year Claim medical expenses on the appropriate tax return Ensure all eligible expenses are claimed Plan medical expenses to maximize claim Health insurance premiums qualify as medical expenses 19
- 20. Tax credits Pension Income Tax Credit – Tips Individuals between the age of 65 and 71 should consider transferring a portion of RRSP to a RRIF or purchasing a non- registered annuity Pension income splitting legislation may allow a spouse to qualify for this credit where they previously would not have Higher income seniors should take into account how this may affect their Old Age Security payments and potential clawbacks 20
- 21. Tax credits Children’s fitness tax credit & Children’s arts tax credit Tip Consider paying fees for next year before year-end 21
- 22. Year-end tax planningfor business owners Businesses can be operated in various legal structures: - Proprietorship - Partnership - Trust - Corporation Incorporated business can have any 12 month year-end it chooses Unincorporated business must calculate income on a calendar year basis 22
- 23. Year-end tax planningfor business owners Pay salaries to family members Salary can be paid to spouse or children Great income splitting technique Salary taxed in their hands, possibly at lower marginal tax rates Must be reasonable Salary is earned income for RRSP purposes Allows spouse to contribute to the Canada Pension Plan (CPP) 23
- 24. Year-end tax planningfor business owners Purchase capital assets before year-end Capital assets can be depreciated for tax purposes at various rates Capital cost allowance (CCA) is limited to ½ of normal rate in year asset is purchased Date of acquisition does not affect the CCA claim in the year of purchase Tip If planning to acquire a capital asset in near future, consider doing so before year-end 24
- 25. Year-end tax planningfor business owners Tax-free gifts for employees Gifts can be for special occasions or employment achievements Cost is tax deductible for employer Total cost of gifts cannot exceed $500 per year Tip Consider paying employee gifts and awards totaling less than $500 as non-cash gifts 25
- 26. Canada Pension Planchanges for 2012 In 2011 Premium for postponed retirement - Old Rule: 0.5% for each month that retirement is postponed after age 65 to a maximum of 30% - New Rule: % will be increased to 0.7% by 2013 – Increased rate phased in over a 3 years period (0.5663% for 2011 and 0.6326% for 2012) – Maximum premium will be 42% by 2013 Effective 2012, individuals who are 60 years of age can apply for CPP even if working but will be required to contribute to CPP until age 65 Remember, someone taking early CPP may want to apply in 2012 when the reduction is 0.52% vs up to 0.6% in the future. 26
- 27. Partnership Returns T5013 Current Rule No T5013 filing needed if less than 6 partners On January 1, 2011, new filing criteria will come into effect, and will apply to partnerships with fiscal periods ending on or after January 1, 2011. New Rule If, at the end of the fiscal period, the partnership has an “absolute” value of revenues and expenses of more than $2 million, or has more than $5 million in assets or If, at any time during the fiscal period, the partnership: - Is a tiered partnership (it is a partner in another partnership or it has another partnership as a partner) - Has a corporation or a trust as a partner - Invested in flow-through shares of a Canadian resource business, or - Is requested to file by the Minister in writing 27
Editor's Notes
- #2 Please insert your name, title from your business card and the name of the dealer on the slide. The dealer is either “Investors Group Financial Services Inc.” or “Investors Group Financial Services Inc. (a financial services firm in Quebec)” This presentation will review various strategies and tax tips that could be implemented prior to the end of the year in order to minimize income taxes. We will discuss various tax tips of interest to individuals including the selling of investments with accrued losses to offset capital gains realized in the year or the previous three years, contributions to an RRSP if you are turning 71 years of age in the year, and paying certain expenses before year end to maximize tax deductions and credits. The session will also explore tax tips for business owners such as purchasing depreciable assets late in the year, paying salaries to family members, and non-cash gifts to employees. Note that this presentation contains some time sensitive information and should be used only until December 31, 2012.
- #4 This slide is intended to show the importance of tax planning. Ensuring an individual claims all of their available tax deductions and credits can save significant amounts of tax. Tax rates above are the top combined federal and provincial marginal tax rates for 2012 for individuals for income other than dividends and capital gains. This is the percentage of tax you pay on your next dollar of income once you are in the top tax bracket. The top tax bracket in all jurisdictions starts at $132,406 of taxable income for 2012 . For individuals in the top tax bracket, for every dollar of tax deduction claimed, tax is saved at the rate outlined above. An example can be given of the tax savings provided by an extra $1,000 of RRSP contribution for your province.
- #5 Individuals are taxed on a calendar year basis, so December 31 , 2012 is the last day for most transactions that affect your 2012 income taxes. Consultants like to remind clients that good tax planning is a year-round activity. Human nature being what it is, some special motivation is often needed. For many, the end of the calendar year has important tax consequences that provide extra motivation to focus on tax planning.
- #6 If you have realized capital gains in the year, consider selling securities with accrued capital losses before the end of the year if you have capital gains that you can apply it against. Capital losses can generally only be deducted against capital gains. A net capital loss occurs when allowable capital losses exceed taxable capital gains in a year. This amount can be carried back three years or forward indefinitely to offset past or future taxable capital gains. If a net capital loss is realized in 2012 or future years, the loss could be carried-forward to be applied against capital gains realized in subsequent years. Since the capital gains inclusion rate is currently 50 per cent, the losses would offset future gains at this same 50 per cent inclusion rate. However, if capital gains were realized in 2009, a capital loss realized in 2012 should be carried-back to that year to offset the gains which would no longer be available after this year given the three year carry-back rule. As explained on slide # 18, no tax applies on any capital gains realized where an ‘in kind’ charitable donation of publicly-traded shares, bonds, or mutual funds is made.
- #7 Beware of the superficial loss rules if planning to repurchase the assets sold at a loss. A superficial loss is defined as a capital loss arising on a taxpayer's disposition of capital property where the same or identical property is acquired by the taxpayer, his or her spouse, or a corporation controlled directly or indirectly by the taxpayer, during a period commencing 30 days prior to or ending 30 days after the disposition of the property. The Income Tax Act prevents double taxation by adding the amount of the superficial loss to the adjusted cost base of the substituted property, thereby placing the taxpayer in the same tax position in regard to the substituted property as was the case prior to the transactions. No tax advantage gained, but no tax disadvantage either. When considering the sale of mutual fund units to realize a loss, the client must ensure that units of the same fund were not purchased in the 30 days prior to the proposed redemption and must make sure that they did not own units of the same fund 30 days following the disposition. Different series of the same mutual fund are considered identical properties. Trust units and shares of corporate class of the same fund are not considered identical properties. Note that a loss realized on the transfer of property to a registered plan (i.e. RRSP, RRIF, RDSP or TFSA) is deemed to be zero and is not a superficial loss. This means that the loss cannot be added to the ACB of a substituted property. If a client disposes of property at a gain, then the capital gain is realized and must be reported, even if the client reacquires the property within a short time period.
- #8 RRSP contribution limit for 2012 is 18% of the previous year’s earned income (to a maximum of $22,970 ), minus the value of any benefits accrued in the previous year if you were a member of a pension plan or deferred profit sharing plan (reported as a pension adjustment or PA). This is added to any unused RRSP contribution room from prior years to determine maximum deductible contribution amount for 2012 . Unused RRSP contribution room can be carried forward indefinitely RRSP contributions must be made on or before 60 days following the year ( March 1, 2013 for 2012 ) to be deductible for the year. Since RRSP contributions don’t have to be deducted in the year of the contribution, some individuals may want to consider deferring the deduction to a future year in which the individual is in a higher tax bracket. It’s important to look at the value of a bigger tax saving vs. the opportunity cost of delaying the tax deduction. NOTE TO CONSULTANT: Consider highlighting the additional benefit that RRSP contributions can provide for some individuals, such as increasing refundable tax credits like the Child Tax Benefit which is based on family income.
- #9 There has been a misconception in some circles that spousal RRSPs are no longer necessary due to pension income splitting, but that is not necessarily true. For example, spousal RRSPs are still useful in a few different scenarios. When individuals need or want to split the income derived from RRSP withdrawals prior to age 65 or when the intent is to split more than 50% of RRSP income (spousal RRSPs allow individuals to split up to 100% of their RRSP income). Spousal RRSPs also allow an individual over the age of 71 to continue to make contributions, as long as they have contribution room and their spouse is less than age 71. Spousal RRSPs can also increase amounts available under the Home Buyers Plan or Lifelong Learning Plan since each spouse can withdraw up to the limit from RRSPs they own. In order to discourage the abuse of the spousal RRSP concept, the Income Tax Act contains provisions which will tax certain withdrawals from spousal plans in the hands of the contributor spouse. These provisions are referred to the spousal RRSP "attribution rules". When an amount is withdrawn from a spousal RRSP the lesser of (a) and (b), as follows, must be included in the contributor spouse's income for the year of withdrawal: The amounts withdrawn from a spousal RRSP The amounts contributed by the contributor spouse to any spousal RRSP in the year of withdrawal and in the two immediately preceding calendar years This means that the annuitant spouse must wait approximately three years after the last contribution to a spousal RRSP before a withdrawal could be made without affecting the taxable income of the contributor spouse. By contributing to a spousal RRSP before the end of the current year rather than waiting until the first 60 days of the following year, the three year attribution period starts one year earlier. This means that, assuming no further spousal RRSP contributions are made in the coming years, a spouse could withdraw funds from a spousal plan in 2015 if the last contribution was made in 2012 . If the last contribution was made in the first 60 days of 2013 , the attribution rules would continue to any withdrawals in 2015 , even though the contribution can be deducted on the 2012 tax return. In an extreme example, contributing on December 31 st versus January 1 st (one day earlier) of the following year cuts the attribution period by one year. Minimum amounts received from a spousal RRIF are not subject to these attribution rules. Note that the minimum amount from any RRIF is zero in the year it is established. Also, the RRIF minimum is zero in 2012 for persons who attain age 71 in the year.
- #10 Individuals cannot own an RRSP past December 31 st of the year in which they turn 71 years of age. By December 31 st , the RRSP must be: collapsed and tax paid on the fair market value of the plan’s assets used to purchase an annuity transferred to a RRIF Since your RRSP must be wound-up by the end of the year in which you turn 71 years of age, your RRSP contributions for the year must be made by December 31 st . You do not have the extra 60 days after the end of the year as you have in the past. If you have earned income in 2012 and will thus generate RRSP contribution room for 2013 , consider making an overcontribution to your RRSP in December 2012 (before winding it up) for this additional room. The contribution will be deductible on your 2013 income tax return. You will have to pay a 1% per month penalty tax for the amount of the overcontribution exceeding $2,000, but this penalty will only apply for December 2012 since the additional RRSP contribution room will be created as of January 1, 2013 . In most cases, the additional tax saved plus the tax deferral on the investment income earned within the registered plan in future years will more than offset the penalty tax. Take for example, a 71 year old individual in Manitoba in the highest marginal tax bracket of 46.4% who is still working. He will create RRSP contribution room of $ 23,820 in 2013 . If this individual makes an RRSP contribution of $ 23,820 in December, their penalty tax would be 1% of $23,820 minus the $2,000 over-contribution cushion, or 1% of $21,820 = $218 . If this individual is still in the highest tax bracket in 2013 , the RRSP deduction would result in a tax savings of approximately $ 11,052 . If there is a younger spouse, spousal contributions can continue to be made even after the year in which you turn 71 to use any unused or new RRSP contribution room. This can be done until the year in which the spouse turns 71 years of age.
- #11 Individuals who are considering using the Home Buyers‘ Plan near the end of the year can benefit from delaying participation in the program until the start of the following year due to the fact that it can extend both the time period allowed for purchasing a home and the start date for repaying the amounts withdrawn by one year. Individuals participating in the Home Buyers’ Plan must purchase a home by October 1 st of the year following the year of the withdrawal. Thus, a withdrawal on December 31, 2012 would only give the participant until October 1, 2013 to purchase a new home compared with a withdrawal on January 2, 2013 , two days later, would allow the participant until October 1, 2014 to purchase a new home, providing much greater flexibility by extending the deadline by one full year. HBP repayments must begin 2 years after the year of the withdrawal. Using the same example, a withdrawal on December 31 st , 2012 would result in a required repayment in the 2014 taxation year, while a withdrawal on January 2, 2013 would not require a repayment until the 201 5 taxation year (contributions made up to March 1, 2016 could be designated as repayments for 2015 ). Multiple withdrawals to a maximum of $25,000 are allowed under the HBP, but all withdrawals must be made in the same calendar year. Therefore if a participant is not withdrawing the maximum in 2012 and wants to take more funds out under HBP in the future, they should delay participation until 2013 to allow greater flexibility. If HBP withdrawals have been made in 2012 , individuals should ensure all additional withdrawals are made by December 31 st 2012 , assuming they have still not purchased their home. Remember the HBP max withdrawal limit is $25,000. Individual that have already participated in the program and have a repayment due in 2012 should remember to make the required repayment by March 1, 2013 , otherwise the required repayment amount will be included in their income for 2012 .
- #12 If your child is turning 15 this year, then you have to take certain steps to ensure that the child will be eligible to receive the Canada Education Savings Grant (CESG) next year and the year after – i.e. in the years when the child turns 16 and 17. By the end of this year, you have to be able to show that either: You contributed at least $2,000 to an RESP for your child (and did not withdraw it), or You contributed at least $100 to an RESP for your child in any given 4 years (and did not withdraw it). So if you’ve never established an RESP for your child before, but he or she is turning 15 sometime during this calendar year, now is the time to act! Consider contributing at least $2,000, and maybe even $5,000, so as to collect some CESG this year, and preserve the right to get it in the following 2 years. If you’ve already been making RESP contributions for your child, congratulations! But don’t forget to keep on making those contributions, whether in annual lump sum amounts, or through Pre-Authorized Chequing arrangements. If your child still has CESG room accumulated and carried forward, then you’ll probably want to contribute $5,000/year until you get all caught up, after which reducing your contributions to $2,500/year may be suitable. But you could also choose to make contributions over and above what you need to get the CESG, so as to enjoy the benefits of tax-deferred compound growth.
- #13 While “in-kind” transfers to a TFSA are technically allowed there are a few points to be aware of. First, if the non-registered investment has a capital gain, the gain will be triggered for tax purposes. Secondly, if a capital loss results from an “in-kind” transfer the loss will be denied. Individuals who are going to transfer current non-registered investments into their TFSA should consider using investments with capital losses. Due to the stop-loss rules that would deem the loss to be nil, individuals should ensure they trigger the capital loss at least 30 days prior to repurchasing the same or similar investment inside or outside of the TFSA. They could dispose of the investment on December 1 to trigger the loss and leave it invested in money market funds until January 2 when they could invest in a TFSA and re-purchase the original investment. Alternatively they could sell the investment and use the cash proceeds to contribute to a TFSA, then wait 31 days before re-purchasing the original investment. If near the end of the year an individual is considering making a withdrawal from a TFSA, they should make it before the end of the year rather then early in the new year. This would provide them with increased contribution room one year earlier. If an individual makes a $2,000 withdrawal from their TFSA in December of 2012 , they will have their contribution room increased by $2,000 for 2013 , however if they do not make the withdrawal until January 2013 , then the contribution room increase will not occur until 2014 . Thus a withdrawal made one month (or even a few days) early creates contribution room a year earlier.
- #14 Form RC240 http://www.cra-arc.gc.ca/E/pbg/tf/rc240/rc240-12e.pdf Remember it might be easier to make the spouse a successor holder to avoid having to make a transfer of the TFSA proceeds and the filing the form RC240.
- #15 Individuals are taxed on a calendar year basis, so December 31, 2012 is the last day for most transactions that affect your 2012 income taxes. Most items that are eligible for a tax deduction or tax credit must be paid by the end of the year (some exceptions, such as medical expenses or RRSP contributions). Individuals should plan the timing of their payments to maximize their tax advantage.
- #16 The list above includes some of the more common expenses that should be paid in the year to maximize the applicable tax deduction or credit (there is an exception for medical expenses that we will see in a few slides). In addition to ensuring all amounts that are due in the year are paid in the calendar year (i.e. child care expenses, investment expenses, alimony and maintenance), there are some other strategies that can be used to maximize the tax advantages. The more common ones will be discussed on the next few slides.
- #17 Federal Credit: first $200 @ 15% over $200 @ 29% Provincial tax credit is calculated at the lowest tax rate on the first $200 and the highest tax rate on donation above $200 except for the following provinces: In Alberta, the tax credit rate on the first $200 of donations is 10% and on donations above $200 is 21%. In Quebec, the tax credit rate is 20% on donations up to $200 and 24% on donations above $200. The CRA’s administrative policy is to allow spouses to claim charitable donation receipts made out in either their name or their spouse’s name. Consider combining charitable donations made by each spouse and claiming the total donations on one return to maximize the charitable tax credit. If an individual typically donates small amounts every year, they should consider combining two or more years of donations into one year. This would put more or the total donation over the $200 annual threshold and generate a larger combined tax credit. Maximum claim is 75% of the individual’s net income for the year and increased to 100% for the year of death. If donations total more than the income threshold in any particular year, the tax credit can be carried-forward to any of the following five years. An individual can also choose not to claim a donation credit in the year of the donation and rather claim it in any of the next five years. This may be advantageous if they anticipate making a large donation in the following year in order to maximize the tax credit. Rather than donating cash, an individual should consider donating publicly traded securities or mutual funds. The tax credit is calculated in the same manner (i.e. based on the fair market value of the gift) , but none of any capital gain resulting from the donation will be included in income where the donation was made after May 2, 2006.
- #18 Rather than donating cash, an individual should consider donating publicly traded securities or mutual funds. The tax credit is still calculated based on the fair market value of the gift , but when calculating the taxable capital gain, the inclusion rate is 0% for the donation rather than 50% if the donation was made in cash after disposing of the investment. For example, let’s assume an individual living in British Columbia has non-registered mutual funds with a fair market value of $100,000 that they wish to donate to a charity. She is in the highest tax bracket in BC , therefore her marginal tax rate is 43.7% The capital gain on these funds is $20,000. If she were to redeem these funds and make a cash donation she would have a taxable capital gain of $10,000 due to the 50% inclusion rate for capital gains and would have $4,370 of tax payable. However, if she were to simply donate the mutual funds “in-kind” she would still have a capital gain of $20,000, but the taxable capital gain would be nil due to the 0% inclusion rate on “gifts in kind” resulting in a tax saving of $4,370 to her.
- #19 Contributions to federal political parties or to candidates in federal election campaigns qualify for the Political Donation Tax Credit. The tax credit for political donations starts out at a very generous rate of 75% for the first $400 of donations and is reduced as the donation increases until the federal credit is eliminated for donations above $1,275. This results in a maximum federal credit amount of $650 for political donations. Remember that most provinces have a political donation tax credit as well, but only for provincial donations. If clients make political donations on a regular basis, they are better off contributing no more than $400 per year to maximize the tax benefit of this donation.
- #20 The threshold for 2012 is 3% of net income until net income exceeds $70,300 , at which point the threshold becomes a flat $2,109 . Only expenses beyond this threshold are eligible for the medical expenses tax credit. Medical expenses can be claimed by picking any 12-month period ending in the year. For example, if no medical expense claim was made for any expenses incurred after May of last year, this year’s claim can include any 12 month period starting in June of last year and ending no later than December of this year. In the year of death, medical expenses can be claimed for any 24 month period that includes the date of death. Because of the 3% income threshold, family medical expenses should be combined and claimed on only one tax return. It is usually better for the spouse with the lowest net income to make the claim, provided they have sufficient income tax to pay to make use of the credit. Plan medical expenses to maximize your claim. Consider incurring some necessary but possibly discretionary expenses within the chosen 12 month period (i.e. dental work which could wait but would be better to claim within the chosen period).
- #21 To maximize the credit, each spouse should aim to have at least $2,000 of qualified pension income annually as unused credit cannot be carried forward, although this will result in some provincial taxes payable. If a person is 65 or older, they should arrange to receive $2,000 of qualified pension income before the end of the year by using a RRIF to generate income or by purchasing a non-registered annuity. Remember that only the income portion of the non-registered annuity payments is considered qualified pension income for purposes of this credit. The pension income splitting rules present an opportunity for spouses who previously did not have any “eligible pension income” to qualify for the pension income credit. The “eligible pension income” that is being split retains its’ character when allocated to the other spouse. Therefore, the spouse who is allocated the pension income may be able to qualify for the pension income credit as long as they meet the age requirements. For example, a spouse who is 65 or older and allocated RRIF income would qualify for the pension income credit, but a spouse under the age of 65 would not qualify for the pension income credit even though they are eligible for pension income splitting.
- #22 The children's fitness tax credit allows parents to claim a maximum of $500 per year for eligible fees paid for each child who is under 16 at any time during the year (or under 18 if eligible for the disability amount at the beginning of the year in which an eligible fitness expense was paid). As with most other non-refundable tax credits, the credit is calculated by multiplying the eligible amount by the lowest marginal tax rate (15% in 2012 ). The year in which the tax credit can be claimed is determined by the date when the fees are paid, not when the activity takes place. Therefore, if an individual does not have enough fees in the current year to maximize the credit they could prepay fees for the following year and still claim them for the credit in the current year. The children's arts tax credit also allows parents to claim a maximum of $500 per year for eligible fees paid for each child who is under 16 at any time during the year (or under 18 if eligible for the disability amount at the beginning of the year in which an eligible arts expense was paid). As with the children’s fitness tax credit the year in which the tax credit is claimed is the year in which the fees are paid, not when the activity takes place.
- #23 A business can be operated as a proprietorship, a partnership, or within a trust or a corporation. Corporations can have any 12 month period year-end they chose. They do not need to have a December 31 st year-end, and in fact many do not. Individuals are taxed on a calendar year basis, so December 31, 2012 is the last day for most transactions that affect your 2012 income taxes. Business owners who operate their businesses personally or in a partnership will need to calculate their business income on a calendar year basis. Regardless of the legal structure of the business and its year-end, there are “year-end tax planning tips” which apply to all businesses.
- #24 Applicable whether you carry on a business personally or through a corporation. Salaries paid or accrued to a spouse or child can reduce the business owner’s income and be taxed in the spouse or child’s hands, possibly at lower marginal tax rates than if the income had been earned by the owner. The net tax saving is the difference in tax rate between the owner (as high as the highest tax rate in your province) and the family member (as low as 0%). This is a great income-splitting technique. Salary must be “reasonable” based on the services performed by the spouse or child for the business. The general rule is that the salary should be comparable to what would be paid to a non-related party for performing the same work. The basic personal amount for federal tax purposes is $10,822 for 2012 . Salary is earned income for purposes of making RRSP contributions. This allows the spouse and children to create RSP contribution room for future years (ensure they file a tax return to report the salary). Salary paid to a spouse would be considered pensionable earnings for CPP purposes. CPP rates for 2012 : Employee contribution rate is 4.95% of pensionable earnings Maximum pensionable earnings are $50,100 Basic yearly exemption is $3,500 Maximum employee contribution is $2,307 CPP contributions only start when employee is 18 years of age, so would not be applicable for salaries paid to minor children. Salaries paid to family members are generally not subject to Employment Insurance premiums.
- #25 Capital assets can be depreciated for tax purposes at various rates depending on the type of asset. Each type of depreciable asset falls into a specific type of asset class with a prescribed capital cost allowance (CCA) rate. If an asset is acquired and available for use before year-end, the business can claim one-half of the usual CCA rate. Even if the asset is acquired late in the year, a full year’s CCA can be claimed on the asset at ½ of the normal CCA rate. By accelerating the acquisition of a planned purchase into the current year, not only can ½ of the full year’s CCA be claimed for tax purposes, but next year’s CCA will now be at the full rate and not be subject to the half-year rule.
- #26 Since 2001, the CRA has allowed employers to pay tax-free gifts and awards to employees, subject to certain conditions. The employer can deduct the cost of the gifts and/or awards. In both cases, the total cost of the two gifts, including taxes, cannot exceed more than $500 per year. Where the cost of the gifts or awards exceeds $500, the full fair-market value of the gifts or award will be included in your income. The gift or award cannot be in the form of cash or a gift that can easily be converted into cash, such as a gift certificate. This policy does not apply to gifts and awards given by closely held corporations to their shareholders or their relatives as these gifts or awards would normally be considered to be received by the individuals in their capacity as shareholders and not as employees
- #28 This change will cause a lot more partnerships to be required to file the T5013 Information returns with CRA. This could be an increased cost for accounting fees.