Year-End Tax Planning Checklist
As the end of the year approaches, many people turn their attention to income tax planning. Individuals are taxed on a calendar year basis so December 31, 2009 represents the last date for transactions that affect 2009 taxes. There are other “tax deadlines” that fall around this time or early in the new year, such as the Registered Retirement Savings Plan (RRSP) contribution deadline. Therefore, the year-end is generally a good time to take stock of your income and deductions and to make decisions about your overall tax position for 2009.
Ideally, tax planning should be considered on an ongoing basis throughout the year as part of an overall financial plan. All taxpayers should review their particular situation regularly to ensure that they’ve structured their financial affairs to minimize tax as much as possible. In particular, any major transactions should be examined in advance to ensure that tax considerations are taken into account.
However, even if you haven’t actively monitored your tax situation throughout the year, there are still a number of steps you can take before year-end to minimize your taxes for 2009. This edition of the Tax Factor summarizes many of these tax planning ideas. Not all of our suggestions may be appropriate for your particular situation. Others, though included as year-end points, could also apply throughout the year. Your BDO advisor can assist you in determining which of these ideas make sense for you.
Employment income
Pay interest on employee loans before January 30th
If you had a low-interest loan from your employer during any part of the year, you’re deemed to have received a taxable employment benefit. This is calculated as interest at the Canada Revenue Agency’s (CRA’s) prescribed rate for the period during which the loan was outstanding. The amount of the benefit is reduced by any interest you actually paid on the loan. However, the interest must be paid within 30 days of the end of the calendar year.
Note that if you have received a loan by virtue of your shareholdings rather than employment, the amount of the loan will be included in your income, even where interest is charged at the prescribed rate. However, an exception to this rule applies if the loan is repaid by the end of the taxation year of the lender following the taxation year in which the loan was received, in which case the loan balance will not be included in your income.
Reimburse personal operating costs on employer provided automobiles before February 14th
If your employer provides you with a company car, a taxable benefit will be included on your T4. The actual benefit is made up of two parts. The first part is a standby charge based on a percentage of the original cost or the monthly lease payments for the automobile. The second part applies if your employer pays the automobile’s operating expenses. In 2009, this benefit is equal to 24¢ per personal kilometre driven and applies unless all amounts paid for personal operating expenses are reimbursed to the employer by February 14, 2010.
The standby charge and the operating benefit are reduced by the amounts you pay to your employer. For a standby charge reduction, your payment must be made during 2009. For an operating benefit reduction, your payment must be made by February 14, 2010.
Review your personal use of employer-provided automobiles
If your total personal driving is less than 20,004 kilometres (being 1,667 kilometres a month for 12 months) and represents less than 50% of total use, you may qualify for a reduction of the standby charge. Also, if your business driving exceeds 50% of your total kilometres driven, you can calculate your operating cost benefit as one-half of the standby charge, less reimbursements, if this is beneficial.
Review your automobile log to see if you’re close to these thresholds. If so, you may want to reduce personal travel with the company car where possible between now and the end of the year, to reduce your taxable benefits. Also, if you intend to use the alternate 50% method for calculating the operating benefit, you must advise your employer in writing by December 31st.
Purchase employment-related assets before year-end
Employees are entitled to claim tax depreciation called Capital Cost Allowance (CCA) on only three types of assets — automobiles, aircraft and musical instruments — if conditions are met. If you’re entitled to deduct CCA and you’re considering purchasing a new asset, you should do so prior to the end of the year. This will accelerate CCA claims by one year. The asset must actually be available for your use to qualify for a CCA claim. In addition, tradespersons can qualify for a tax deduction of up to $500 for eligible tools they purchase, and a deduction for tools purchased by qualified apprentices is also available. There are conditions that must be met for both deductions.
Review tax-free gifts, awards and social events
The CRA has set administrative policies with respect to employer-provided gifts and awards. As an employee you can receive two non-cash gifts a year from your employer on a tax-free basis for special occasions, such as Christmas, Hanukkah, a birthday or a similar event. Similarly, you can receive two non-cash awards a year from your employer on a tax-free basis in recognition of employment achievements, such as reaching a set number of years of service or similar milestones. In both cases, the total cost of the gifts or awards to the employer, including taxes, must not be more than $500 per year. Where the cost of each gift or award exceeds $500, the full fair-market value of the gift or award will be included in your income. Where the total cost of the gifts or the total cost of the awards (maximum of two each) is more than $500, the fair market value of one or more of the gifts or awards will be included in your income. The employer can deduct the cost of the gifts and awards.
This policy should make it somewhat easier for employers to administer their gifts and awards programs, as it generally removes the need to determine the fair market value of small, non-monetary gifts and awards where they are within the limitations noted above. Note that this policy does not apply to certain gifts and awards. For example, this policy does not apply to cash or near-cash gifts and awards which may include gift certificates or any item that can easily be converted to cash — the value of these gifts and awards will be considered a taxable employment benefit. For more information on gifts and awards that the CRA considers to be taxable employment benefits and that are not covered by their policy above, contact your BDO advisor.
The CRA also has a policy concerning work-related social events. If your employer provides free parties or other social events to all employees and the cost is not more than $100 per person, this will not be considered a taxable benefit to you. Note that ancillary costs such as transportation home will increase the $100 per person amount. If the cost of the party is greater than $100 per person, the entire amount including the ancillary costs will be a taxable benefit and included in your income.
In June of this year, the CRA announced administrative policy changes for taxable employment benefits and in particular for non-cash gifts and awards effective for 2010. To learn more about the policy changes, read our Tax Alert “Canada Revenue Agency Announces New Employee Benefit Rules”.
Next section: Business income
Download this issue of the Tax Factor
