Year-end tax planning

By Fin MacDonald, Fin Tax Service

This month dear readers, using my lens of Helping You to Keep More of YOUR Money, I will discuss year- end tax planning. Depending upon your stage in life, your source of income and family status, there are different opportunities to pursue.

Self Employed

As the year draws to an end some considerations would relate to capital expenditures. Is it time to replace your computer? Do you need a new vehicle or other equipment for your business? Major capital expenditures cannot be expensed in the year they are acquired; they are subject to a depreciation process called ‘Capital Cost Allowance’ (CCA).  For vehicles, for example, the depreciation rate is 30% per year – but only half of that may be claimed in the first year. Making a purchase late in the year reduces the time before the full year’s depreciation may be claimed.

Buying extended health insurance for you, your family, and your employees is also something to look at as the year comes to a close. As a self-employed person these premiums are not subject to the usual 3% deductible for medical expenses but are subtracted from your business income dollar for dollar.

How are your accounts receivable? Accounts that are months overdue may cause year end decision making. Are you going to engage someone outside to try to collect them, or is it time to write them off as uncollectable?

If you have staff, what sort of year has it been? Does some of your staff deserve a year-end bonus? Paying that now lets you reduce your net income.

Is it time to think about incorporating? If your business is successful, incorporating allows you to keep more money inside it and allows it to grow. Tax rates for small businesses that have incorporated are much lower than what individuals pay. For estate planning as well, this is something to consider.

Seniors

If you are 71 or over, have you taken the required amount out of your Registered Retirement Income Fund (RRIF)? If you took it out before the federal budget, have you taken more than you are now required to? If so you have until March 31 to re-deposit it and have it continue to grow within the RIF.

Has this been a year with lots of medical expenses? Are there discretionary items that could be done before year end, dental and denture items come to mind; for those with mobility issues might a new scooter or walker be in order? If you are going south this winter have you bought your travel health insurance yet?

If you downsized this year, have you maxed out your Tax Free Savings Accounts (TFSA) to take advantage of the growth opportunities in the tax free accumulation TFSAs offer?

Looking Forward to Retirement

If you are a couple in your late 40s or 50s, how are your retirement savings doing? If you don’t have workplace based pension plans have you maxed out your Registered Retirement Savings Plan contributions? Tax savings of up to 42% on RRSP contributions make them a favourite! Have you reviewed your non-registered investments with your financial advisors to see if they are still suitable and meet your current risk comfort levels? As children leave is it time to downsize or consider an in-law suite to add to your income?

Young Families

Recent changes to the Registered Retirement Savings Plan Home Buyers Plan (HBP) have raised the amount a person can withdraw to buy a first home from $20,000 to $25,000 – a maximum of $50,000 a couple. This might help you get in to the housing market while providing tax savings as you contribute to your RRSPs. Withdrawls can also be made from RRSPs for the Lifelong Learning Plan (LLP) – up to $20,000 may be withdrawn, but only $10,000 per year. If continuing your education is on your agenda this may be the time to start these withdrawls. Withdrawls under the HBP and LLP are not taken into your income and there are options for the repayment. HBP repayments start the second year after the withdrawal and can be spread over 15 years. LLP repayments start the year after withdrawal and can be spread over 10 years. In both cases the annual repayment amount may be added to your income instead of being repaid but this does lower the long term value of your RRSP.

Planning and saving for post-secondary education for children can be done with the Registered Education Savings Plan (RESP). Education saving strategies are often built around an RESP because the government adds to your savings with Canada Education Savings Grant (CESG) money. An RESP combines flexibility, tax-deferred investment growth, and direct government assistance to help you reach your education savings goals for your children.

Next month in The Beacon, I will be looking at Disability Tax Credits and Medical Expense Deductions.