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Timely year-end tactics to trim your taxes

Year-end is a time when we start thinking about winding down. However, in the field of tax planning, that annual deadline is when we need to take stock, and potentially take action. 

To help you with your planning, we have grouped the following reminders and tips according to some common personal profiles. These are presented in brief to raise awareness, so you should inquire further with your financial advisor and your tax advisor to be certain if and how they may apply in your situation.

1) Spouses & families
2) Education planning & students
3) Househunters & homeowners
4) Disability needs
5) Savers & seniors
6) Investors & markets
7) Getting down to business
8) Estate planning

1) Spouses & families 
Tax refunds & source deductions 
A common reason you may receive a refund is if your employer source deductions exceed actual tax due, for example if you make RRSP contributions outside your workplace. You may wish to begin 2019 by filing Canada Revenue Agency (CRA) form 1213 to have your employer reduce its withholding (if you qualify), allowing you the use of that money, rather than it being a non-interest bearing deposit with CRA.

Strategic spousal RRSP 
Make spousal registered retirement savings plan (RRSP) deposits before year-end if you are planning for withdrawals in the next few years. Tax on the withdrawal is attributed to the contributor if taken in the contribution year plus 2 calendar years. If the money is in before the end of 2018, it can come out in 2021 without concern. If the contribution is made in the first 60 days of 2019 (which can still be applied to reduce 2018 taxes), you have to wait until 2022 to avoid attribution.

Prescribed rate loans
On a gift from one spouse to the other, tax on investment income is attributed back to the giver, but that will not occur if a properly documented loan is used. To qualify, interest on the loan must be charged by the lending spouse to the borrowing spouse at the rate prescribed by tax regulations. The rate adjusts quarterly, but can remain at the level at inception of the loan (even if the regulated rate rises) as long as annual interest is regularly paid no later than 30 days after calendar year-end, being January 30.

The prescribed rate has been at 1% for much of the last decade, reflecting the low interest rate environment we have experienced over this period. In the second quarter of 2018, the rate rose to 2%, and will continue to be at that level as we move into 2019. This remains low relative to the previous historical level, so spouses still have the opportunity to lock in this rate. If the rate in fact drops again to 1% thereafter, spouses can look at the option of paying out an existing loan and establishing a new one.

2) Education planning & students
Registered education savings plan (RESP) key ages 
Canada education savings grants (CESG) are subject to tight rules for a 16 or 17 year old child. The main CESG matching grant value is 20% of what the plan subscriber contributes. By the end of the year the child turns 15 there must be total contributions of $2,000 or at least $100 contributed in four (not necessarily consecutive) past years, meaning that has to begin no later than the year the child turns 12.
Interest on student loans  

If you paid interest on a government sponsored student loan, you may take a deduction in the current year or up to five years carried forward if you don’t have sufficient income to use it in the year it is paid. Your 2018 return is the last opportunity to claim interest that you paid in 2013.

RRSP Lifelong learning plan (LLP) 
If you funded a return to education using the RRSP LLP, you must begin paying back funds the earlier of the second year after you ceased to be a student or five years after your first LLP withdrawal. The year 2018 is the fifth year after a first withdrawal in 2013. Payments may be made in the first 60 days of 2019 to qualify for 2018. Unrepaid amounts are treated as taxable income.

3) Househunters & homeowners
TFSA withdrawals 
If you plan a significant TFSA withdrawal in 2019, you may wish to take your withdrawal before year-end 2018. That way you will get your re-contribution credit at the beginning of 2019, rather having to wait until 2020, which practically only matters if you expect to have cash available to make the contribution.

For your interest, the annual allotment of TFSA room stands at $5,500 in 2018. It rounds up in $500 increments based on an underlying reference figure that increases annually, similarly to tax bracket indexing. Based on the Income Tax Act formula, it appears that TFSA room will increase to $6,000 in 2019, though you’ll have to wait for the official word from the Canada Revenue Agency, usually out by the first week of December.

RRSP Homebuyers plan (HBP) 
If you used the HBP to purchase a new home, your repayment period starts the second year after the year you withdrew funds. The year 2018 is the second year after a withdrawal in 2016. Payments may be made in the first 60 days of 2019 to qualify for 2018. Unrepaid amounts are treated as taxable income.

Principle residence exemption 
As of 2016, a disposition of a principle residence is required to be reported on your annual tax return using Schedule 3 Capital Gains and Losses. While not a year-end issue, it is worth keeping this in mind if you disposed of an eligible property, as failure to report properly could lead to penalties or even a denial of the exemption.

Moving within Canada
If you are planning a move within Canada, keep in mind that generally your annual income is taxed in the province where you are resident on December 31 of the year.  If you are moving to a higher-tax province, it may be beneficial to delay your move until the new year. Or if you are moving to a lower-tax province, an earlier move may serve your interests. Likely you won’t be able to adjust either way for such a major change, but at least you’ll be aware now, rather getting a surprise when you come to file your return. 

4) Disability needs
Registered disability savings plans (RDSPs) 
RDSPs are quite complicated, and need to be evaluated within a much broader planning view. As a starter, a person who is eligible to claim the disability tax credit may be able to open an RDSP. A plan may be opened no later than the year the beneficiary turns 59, and government support money is available up to the beneficiary’s age 49. In 2018, that would mean it is the last year to open a plan for someone born in 1959, and the last year of government support eligibility for someone born in 1969. The government matching grants are as high as 300% of personal contributions, so these times can have very large financial implications.

Home accessibility tax credit (HATC)
For persons 65 and over who claim the disability tax credit, the HATC is an annual credit that can be claimed on up to $10,000 of renovations. As it can be claimed each year, a large renovation might be planned to straddle a year-end to maximize the credit opportunity. 

Medical expenses 
The medical expense tax credit may be claimed on an amount over the lesser of 3% of net income and $2,302 federally / $2,343 for Ontario (2018 figures). It may be claimed for any 12-month period ending in the taxation year, which could inform when you book procedures, or subscribe and pay for qualifying devices and services.

5) Savers & seniors
Final RRSP contributions at age 71 

You can no longer make contributions to an RRSP after December 31 of the year you turn 71. People born in 1947 turn 71 in 2018. As well at that time, existing RRSPs have to be converted into a RRIF, registered annuity or taken as a lump sum. 

If you have earned income in your age-71 year, you could make an over-contribution in December (and be assessed a 1% penalty on that for the month) which will be brought onside when the contribution room becomes effective on Jan 1. Alternately, you would be able to contribute to a spousal RRSP if your spouse is under 71. 

Public pensions between 60 & 70 
The normal commencement date for the Old Age Security and Canada Pension Plan is age 65. You can begin a reduced CPP as early as 60 or an enhanced CPP up to 70, and for OAS you can receive an increased pension by waiting to as late as 70. While this is based on age at a given month (not year-end specifically), it is prudent to be thinking about it as you enter the year when you intend to begin, as the application can take up to 6 months processing time according to government sources.

Assure your pension credit 
If you are age 65 or over, make sure that you are receiving at least $2,000 in pension income that qualifies for the pension credit. This would include income from a registered pension plan (RPP) or a registered retirement income fund (RRIF), but not an RRSP withdrawal. You will need to convert the RRSP (or a portion of it) to a RRIF before year-end to qualify for the credit. 

Registered plan rollovers on death
RRSPs and RRIFs may be rolled over to certain beneficiaries, most often spouses, without tax applying on the transfer. The tax-free rollover can occur no later than December 31 of the year after the death occurred. For deaths occurring in 2017, that means Dec 31, 2018. If there has been a delay for any reason, that will need to be resolved by year-end, or otherwise the plan will become taxable.

6) Investors & markets
Capital gain/loss selling 

In non-registered investment accounts (also known as cash accounts), the sale of an investment can lead to a capital gain or loss. When a loss is realized, it must first be applied to reduce capital gains in that year, then may be carried back as many as 3 years or forward indefinitely. If you have realized capital gains from 2015, then 2018 is the last year you can carry back capital losses to that year, allowing you to amend your 2015 tax return to recover tax paid at that time. 

Settlement T+2 
For timing purposes, the settlement date is when a transaction is completed for tax purposes. Until the middle of 2017, settlement was set at the trade date plus 3 days, or T+3. That has now changed to trade date plus 2 days, or T+2. For year-end, a transaction made by Thursday, December 27 will settle by Monday, December 31, the last business day in 2018.

Interest expense and fee expenses 
A tax deduction is allowed for investment management fees and interest for debt used to acquire business or investments assets (though not for RRSPs, RESPs or other non-taxable plans). To qualify, these must be paid before year-end. 

Mutual funds at year-end 
Many mutual funds distribute their annual income to investors as of a record date near calendar year-end. If you purchase late in the year, you may be taxed on the full year’s distributed income, despite only briefly being a holder in that year. This is not a problem with registered accounts that accumulate tax-exempt, but in a non-registered account you could find yourself with an unwanted tax bill. Though this is accounted for in the investment’s adjusted cost base when you have a later disposition, you are out of pocket in the present. Accordingly, you may wish to defer your non-registered mutual fund purchases until after the end of the year.

7) Getting down to business
Small business rate drop & more 

The current corporate small business tax rate is 13.5% in 2018, comprising 10% federally and 3.5% for Ontario. The federal rate will fall to 9% on Jan 1, 2019, taking the combined rate down to 12.5%. Though apparently small, where large transactions are involved this could be sufficient to influence adjustments to business activity or planned expenses. Speak to your tax advisors before taking any action. 

Dividends before year-end 
The drop in the corporate small business rate will be accompanied by an adjustment in the gross-up and tax credit rates on dividends. While this assures integration of future corporate and personal taxes, it presents an element of double-taxation for current retained earnings. Shareholders may wish to consider dividends before year-end, but this depends on current and expected future income and tax brackets, so again consult with your tax advisor.

Tax-on-split-income (TOSI) and family shareholders
The expanded (TOSI) rules became effective January 1, 2018, targeting certain income distributions, particularly dividends, to spouses and adult children of a principal shareholder of a corporation. Until this year, this only applied to dividends paid to minors related to the shareholder. There are exceptions based on age of the child (18 & over, as distinguished from 25 & over) and their degree of involvement in the business, though these exceptions are not available in the case of incorporated professionals. 

As well, if the principal shareholder is over the age of 65, income splitting with a spouse will likely be possible. Due to the newness and complexity, business owners should discuss with their legal and tax advisors whether and how this may affect them.

Corporate passive investments
New passive income rules will apply for corporate tax years beginning after 2018. The small business rate is available on income up to $500,000, but now for every $1 of passive income over $50,000, that threshold will be reduced by $5. By that formula, the small business rate will be lost in a year once passive income hits $150,000. Concurrently, the refundable dividend tax on hand (RDTOH) rules are being tightened. Recovery of RDTOH will no longer apply on distribution of eligible dividends, instead requiring the payment of higher taxed non-eligible dividends.

Paying dividends before year-end 2018 may reduce the burden these new provisions create. Once more, consult with a tax advisor on how to manage passive corporate investments under these new rules.

Bonuses before year-end 
Employee bonuses from a corporation are deductible in the corporation’s tax year when declared, but do not have to be taken into the employee’s income until actually paid. That can be as late as 179 days after the corporation’s year-end. These arrangements are commonly set up to allow an owner-manager to defer income recognition over a calendar year-end, so close attention must be paid to all dates involved. 

Capital asset purchases 
The general rule for capital cost allowance (CCA is the tax system’s way of dealing with depreciation), is that only half of the year’s CCA may be taken in the year an asset is acquired. What this means for year-end in terms of cash flow is that you may wish to acquire property very close to year-end so that you get half a year’s claim, though only having held the assets for a few weeks or days. More complicated purchases could take longer to prepare closing documents and complete delivery, so consult with your legal and accounting advisors first, before taking it too close to the edge.

8) Estate planning
A good time to review 

While not a tax issue, year-end is a good time to think about your estate planning. We tend to see family during the holiday season, which is a built-in reminder of what estate planning is all about – the people around you, and your relationships with them. And that includes you.

As you review your tax planning, take time as well to consider whether any changes in your property might cause you to revise when or how you intend to share that with those people. Even more importantly, think about the changes you and others have undergone over the last year and what the next year may have in store, then revisit your estate planning to be comfortable that it continues to fit your needs and intentions.

Contact a Meridian branch to book an appointment with an Advisor today.