Year end tax planning

By Fin MacDonald

First, a note. Due to The Beacon’s deadline, this article was written before Federal Finance Minister Joe Oliver’s Fiscal Update on November 12. Changes announced then will be discussed in my article in the February 2015 issue.

The Income Splitting announced in the Prime Minister’s infomercial will affect only a small group in 2014; the bulk of the changes are effective for the 2015 tax year. What is effective for the 2014 tax return is the Income Splitting for Families with children under 18. This will allow two parent families to share income to produce savings of up to $2,000 in Federal Tax Payable, as a Non-Refundable Tax Credit. Harper recognized the concerns of the provinces and made this a “federal only” credit, leaving it up to the provinces to decide whether to follow suit in 2015 and later years. The concerns the provinces had, related to the original cap of $6,000 in federal tax savings that had been floated. Because provincial taxes are set at a percentage of federal taxes, this would have hit hard at many provinces’ revenues.

For Investors

2014 has seen a remarkable increase in North American stock markets; all-time records were reached in both Toronto and New York. Even so, you may have some dogs in your portfolio and taking some losses now to balance your gains might be in order. The last day to sell stocks to have them clear in 2014 is December 24. If you see long term potential in the stocks you have sold, be aware that you must wait 30 days before re-acquiring them or the Canada Revenue Agency will not recognize the sale.

Loaning your spouse money to invest is another way for investors to save on taxes. The CRA sets what is known as The Prescribed Interest Rate. This is the minimum rate which must be charged on loans between people who do not deal at arm’s length. The rate is at its historic low point of 1%. Once the loan is made, the interest rate stays at that rate for the life of the loan. For non-seniors (those who don’t have access to pension-splitting) this can be an excellent means of income splitting and reducing total household tax payable. The interest paid on loans to earn income from investments not held in an RRSP or TFSA is deductible. With the continuing low interest rates this is something to consider.

Maximizing your Tax Free Savings Account contributions is another means of saving tax in the future. Although TFSAs do not offer the deduction when money goes into them, all the money earned in them is tax free. The amount of new room available each year may have been increased to $10,000 by the time you read this. The TFSA may be rolled over tax free from a deceased spouse to the surviving spouse.

Don’t forget that fees paid for investment advice or planning and related accounting fees are tax deductible in the year you paid them. Sitting down with your accountant or investment advisor and looking at your future plans may be something to do before year end.

Retirement Planning

This year’s deadline for RRSP contributions is March 2, 2015. A client had asked how much he could contribute to his spouse’s RRSP. She has a large contribution amount, he a much smaller. Unfortunately he can only contribute to her RRSP up to HIS contribution limit. Still, this can be another excellent means of future income splitting and tax saving.

The deduction that can be taken for an RRSP contribution does not have to be claimed in total the year it was made. If you are in a middle tax bracket and you maximize your contribution, it may make sense to deduct only enough to lower your net income to the next lower tax bracket. The balance of the contribution deduction can be carried forward and deducted in the future to insure maximum tax benefits. All the while the amount inside your RRSP is growing tax free. Also, making monthly contributions to your RRSP allows it to grow faster than making one contribution on March 2.

Medical Expenses

Medical expenses do NOT need to be claimed on a calendar basis. For example, if you did not have enough expenses in 2013 but had some late in the year, you can chose any date in 2014 and go back 365 days to find the best claim. If in 2014 you have had a lot of medical expenses and there are some optional expenses you are thinking of getting done – new glasses or dental work, new dentures or a hearing aid – doing them, and paying for them before year end, may increase your medical expense deduction and save on your tax bill.

Charitable Donations

The first $200 of charitable donations attracts a credit of 15%, any above, 29%. Donations can be carried forward for up to five years and may be claimed by either spouse. It may make sense to only claim the donations every five years, unless the amount donated each year is quite large.

Self Employed

Before year end is a good time to review your business’s situation. Do you have purchases that could be made, both of a continuing nature and of a capital nature? Doing so now can enable you to lower your taxes payable on the 2014 return. Writing off bad debts also can reduce your amount payable come April 30.

Families

Do you have students in post-secondary education? Transferring the tuition and education credits students receive can reduce the parents’ tax payable. Up to $5,000 in credits can be transferred to a parent or spouse. The balance can be carried forward until the student needs the credit. The amount parents can deduct for the children’s fitness tax credit has been doubled from $500 to $1,000. There is also the new income splitting mentioned at the beginning of the article and other proposed changes for the 2015 tax year.

I appreciate the opportunity to share my tax planning ideas with you and would like to thank the staff at The Beacon for allowing me to do so. Using my lens of Helping You to Keep MORE of Your Money, I look forward to the February issue. All the best of the Season and the New Year to all my clients and readers!