With less than a month to go before the end of the year, it is time to give some thought to how you are going to put your affairs in order to minimize your taxes next April. Below I have provided several points which you should contemplate for your own tax situation. Some of these are methods you should consider each year and some are very specific to this year, as the Federal Government proposed some significant changes to the Income Tax Act regarding corporate tax planning.
The end of the year is a good time to review your portfolio. If there are stocks you are holding at a loss, you are better off to realize that loss before the end of 2017. In doing so, you will be able to use those losses to offset any capital gains you may have. If you do not have any capital gains in the current year, you can carry back your capital losses up to three years or forward indefinitely.
Age 71 RRSP Over-contribution
In the year in which you turn 71, you must convert your RRSP to a RRIF by December 31. Once you are in the year you turn 72, you may no longer make personal RRSP contributions; however, spousal RRSP contributions are still permitted if you spouse is under age 72. If you have earned income in your age 71 year, you can make a RRSP contribution in December. Though you will be over-contributed for one month, as you will have new contribution room on January 1, and have a penalty tax on it, the tax savings from the deduction could far outweigh the penalty.
December 31 is the final day to make a charitable contribution and receive the tax credit for your 2017 tax filing next April. With donations, the amount you contribute and the amount you earn have an impact on the credit you will receive. The first $200 attracts credits at the lowest marginal tax rates, but those above $200 can attract credits at or near the top bracket. In Ontario, for example, the first $200 will attract a credit of 22.89%, income below $220,000 a credit of 46.41% and above $220,000 50.41%.
First-Time Donor’s Super Tax Credit (FDSC)
This is the final year for the FDSC. If you have not claimed the donation tax credit in the past five years you can claim the FDSC on the first $1,000 of donations. This is an additional 25% of federal tax credit across the board making the federal tax credit 40% on the first $200 and 54% on the next $800 of donations.
Donation of Capital Property
Though gifts of capital property are not eligible for the FDSC, they are an effective way to donate when compared to cash. Consider a qualified investment such as a publically traded stock. You can donate it at its fair market value (FMV) and receive a tax credit equal to that FMV. The additional benefit comes into effect when calculating the capital gain due on the disposition of that security. The capital gain is not taxable. As these donations often take significantly longer than cash, you should consider proceeding as soon as possible to avoid missing the December 31 deadline.
Effective at the beginning of 2018, the “kiddie tax” will be expanded to include all non-arm’s length dividend recipients from a private corporation. If there are not reasonable contributions to the business for which the dividends are compensation, they will be taxed at the highest marginal tax rate. Thus, if you are able to, this year would be the time to pay out additional dividends to take advantage of the income splitting opportunity this strategy affords. In addition, consider a share reorganization so that contributing family members have different classes than non-contributing.
Passive Investment Income
As the rate of tax on income can be much lower than if taxed personally, there is the potential for an increased rate of savings inside the corporation. This can compound over years providing in the estimation of the government an unfair advantage. The initial proposal would remove the refundable tax on investment income, making the rate of taxation in excess of 70% in certain situations.
Since that point, the government has relaxed its point of view to allow for $50,000 of investment income to continue under the previous rules. This would be equivalent to $1,000,000 at a 5% rate of return. They now feel that this should limit its impact to only the top 3% of corporations.
The tax landscape just grew increasingly complex with these recent tax changes. Unless you are an expert yourself, navigating this new environment should be done so with an experienced hand at the helm. With less than a month to go, do not leave your planning to chance. Your pocketbook will thank you next spring.