Tax planning tips before year end
- by Monica J. Weissmann, CFP, CIM, MEE
“A Spoonful of sugar helps the medicine go down” – If/When you do it, before the 2018 year-end deadline!
The market volatility in the last few month has been nerve wracking and painful for all investors. However, there are still tax planning opportunities that may be available to you before the December 31 deadline. Implementing them may help reduce the pain, keep the confidence in the stock market, and increase the amount of $ which stays in your pocket, or makes your wealth go up.
Remember the Mary Poppins song? “A spoonful of sugar, helps the medicine go down”?
Tax Harvesting
Tax Loss selling is sometimes called “tax harvesting”. Selling a holding which has lost money (incurred a capital loss) in a non-registered account will allow you to offset an equal amount of capital gains, provided it is executed before the deadline of December 31, 2018. In order for your loss to be immediately available for 2018 (or one of the prior three years), the settlement must take place in 2018.
To complete settlement by December 31st, the trade date must be no later than December 27, 2018. If your investment involved a currency exchange, this should be taken into account when calculating the capital loss. If the same investment is desired, a repurchase is not allowed for at least 30 days, otherwise the tax loss will be denied by CRA. However, a different (but similar) investment could be acquired without penalty. The tax loss may also be denied when it is the result of a transfer “in-kind” to a registered account (RRSP or TFSA). Consult a professional before proceeding. If you are planning a TFSA withdrawal in early 2019, consider withdrawing the funds by the 31st of December, 2018, so you would not have to wait until 2020 to re-contribute that amount.
Split Income Strategy
If you are in a high tax bracket, it might be beneficial to use the “split income strategy”. This is executed by “lending” money to a family member (such as your spouse, common-law partner or children) who is in a lower tax bracket; the loan is charging a “prescribed” interest rate, and paying it once a year. The money may be invested to generate income, which will be taxed in the hands of the lower income bracket of the family member.
Using this strategy will avoid attribution, provided the rate of interest on the loan is at least equal to the government’s “prescribed rate,” which is 2% until at least the end of 2018. If you implement a loan before the end of the year, the 2% interest rate will be locked in and will remain in effect for the duration of the loan, regardless of whether the prescribed rate increases in the future. Note that interest for each calendar year must be paid annually by January 30th of the following year to avoid attribution of income for the year and all future years. When using the loaned funds, the choice of investments will affect the tax that is paid by the family member. It may be worthwhile to consider investments that yield Canadian dividends, since a dividend tax credit can be claimed by individuals to reduce the tax that is payable. When the dividend tax credit is claimed along with the basic personal amount, a certain amount of dividends can be received entirely tax-free by family members who have no other income.
RESP Grants
RESP contributions are an annual opportunity to contribute and receive government grants that are defined by calendar year, so it is important to maximize the contribution before the year end. These are not tax deductible from your hard earned income, but when you have the money invested in high quality holdings and you keep them growing over a longer period of time, they will generate the needed funds for the higher education of your children, and will be taxed in their hands (which means sometimes they may not be taxed at all!). This is a highly worthwhile use of your hard earned cash, as education is the only asset that nobody can take away from your child under any circumstances. They will benefit from education anywhere they go in the world, wherever their lives will take them.
Taxation of Private Corporations
Incorporated business owners may be particularly interested in the discussion of steps to consider regarding changes to the taxation of private corporations. Certain expenses must be paid by year end to claim a tax deduction or credit in 2018. This includes investment-related expenses, such as interest paid on money borrowed for investing, and investment counseling fees for non-RRSP / RRIF accounts.
The new tax changes are a hard thing to swallow. They are so complex that I will not dare to even start commenting on them. They certainly guarantee job security for many professionals in the tax advising field. That should not diminish the strong recommendation to seek their advice. Certainly you should have investments which will generate the maximum allowed income of $50K, and use all other tax shelters legally provided in Canada.
Investments in private corporation are an area worth your attention, being sure to do a thorough due diligence before committing your funds. They do look good (on paper) always, because of the rather large time frames for the frequency of updates. That only means the need for due diligence is even higher. There may be good returns, but they should be pursued only if they conform to the requirements –you may have to be an accredited investor to be eligible to do it. Paperwork requiring signatures may be much more extensive than in other investment areas (OM versus memorandum offerings).
There are many other things related to tax planning, which can be done before year end.
Approach your tax professional for a consultation, or call us for a referral.
Toronto: 647-405-8535
Toronto Office: 416-628-5770 (ext. 3910)
We wish you a sweet taste in your mouth for the end of this difficult year!
