If you’re like many Canadian individuals, you probably don’t spend too much time worrying about your personal income taxes until the filing deadline gets closer, which for 2016 (depending on whether or not you or your spouse are self-employed) won’t be until either May 1, 2017 (as April 30 falls on a Sunday in 2017) or June 15, 2017. However, as we approach the final weeks of 2016, it may be a good idea to turn at least some of your attention to personal income tax planning. This is because individuals are taxed on a calendar year basis, meaning that December 31, 2016 generally represents the last date for transactions that affect 2016 personal income taxes. So while you may not be thinking about tax planning on an ongoing basis throughout the year, there are good reasons to contemplate a number of tax planning strategies that you can implement now, before it’s too late.
Below are ten easy strategies to consider in order to minimize your taxes. Keep in mind that while not all of these strategies may apply to your particular situation, your BDO advisor can assist you in determining which of these may make sense for you.
1. Consider selling investments with accrued losses
If you’ve realized capital gains in 2016 or in one or more of the last three years, consider selling assets with an accrued loss to offset these gains. In order for a disposition of such assets to be included in your 2016 tax year, you’ll have to sell them on or before the stock exchange’s last trading day for settlement in 2016. The last day for settlement in 2016 will generally be December 23 for Canadian exchanges. For other transactions, legal ownership must be transferred before the end of the year.
If you do decide to undertake a tax-loss selling strategy, you should be aware that rules (known as the stop-loss rules) may apply to deny losses on certain dispositions of property. For more information on the stop-loss rules, read “Tax Rules to Remember When Triggering Capital Losses” in the 2015-10 issue of the Tax Factor. Also, consult with your BDO advisor in advance of any disposition to ensure that the loss you trigger can be claimed.
2. Pay amounts eligible for deduction or credit
Many items which are creditable or deductible for tax purposes must be paid by the end of the year. These amounts include alimony and maintenance, child care expenses, investment counsel fees, professional dues, charitable donations, medical expenses and political contributions. To ensure that you will benefit from the tax deduction or credit in 2016, be sure that you pay these amounts by December 31, 2016.
If you registered your, or your spouse’s or common-law partner’s, child in an eligible fitness or arts program, you may want to pay any outstanding fees before December 31, 2016, so that these fees will qualify for the federal children’s fitness and arts tax credits. Recent legislative changes mean that this will be the final year that you can claim these credits. Also, the maximum eligible amount for each of these credits has been cut in half (from $1,000 to $500 for the children’s fitness tax credit and from $500 to $250 for the children’s arts credit) for 2016. Both of these credits will be eliminated beginning in 2017, and for later taxation years.
3. Make a contribution to your RRSP
In order to be deductible for 2016, your Registered Retirement Savings Plan (RRSP) contribution must be made on or before March 1, 2017. If you want to know how much you can contribute for 2016, your RRSP contribution limit will appear on your 2015 Notice of Assessment or you can check online using the Canada Revenue Agency’s (CRA’s) “My Account”. Simply, your contribution limit for 2016 is 18% of your 2015 earned income (to a maximum of $25,370) less your 2015 pension adjustment, if any, plus any RRSP room carried forward from prior years. For more information on contributing to an RRSP, read our Tax Bulletin titled Answering Your RRSP Questions.
As well, remember that if you will be 71 years old by December 31, 2016, you must collapse your RRSP by the end of the year. At that time, you can pay tax on the fair market value of the plan’s assets, purchase an annuity or transfer your RRSP into a Registered Retirement Income Fund (RRIF). No tax is paid at the time of the purchase of the annuity or at the time of conversion into a RRIF. Note that despite collapsing your own RRSP, you may still be able to contribute to your spouse’s RRSP under certain conditions. Speak to your BDO advisor about tax planning opportunities available in the year you turn 71.
4. Remember to make your required HBP repayment
If you participated in the Home Buyers’ Plan (HBP) prior to 2015, you may have a repayment due in the 2016 taxation year to the extent that your withdrawals have not been fully repaid. In order to make sure that the HBP repayment is not included in your taxable income for 2016, the required amount must be repaid to your RRSP on or before March 1, 2017.
5. Pay interest on low-interest loans
If you have entered into an income-splitting arrangement with family members by loaning funds to either a spouse or a child at the prescribed rate (which is the interest rate set quarterly by the CRA based on short-term Treasury Bill rates), then you will want to make sure that the interest on such loans is paid before January 30, 2017. If the interest is not paid on time, the loan will be subject to the attribution rules which tax the income earned by your spouse or child in your hands. For more information on income splitting with family members, contact your BDO advisor.
As well, if you received a low-interest loan from your employer during any point in the year, you will want to ensure that interest is paid on that loan before January 30, 2017 in order to avoid a deemed taxable employment benefit. This benefit will be calculated at the CRA’s prescribed rate for the period that the loan was outstanding (which remained at 1% throughout 2016), less any interest actually paid.
Note that if you received a loan by virtue of your shareholdings rather than employment, a different set of rules will apply. Contact your BDO advisor if you borrowed money from your corporation during the year to discuss whether there are any income tax implications.
6. Pay reasonable salaries to family members
If you carry on a business and your spouse or children work for you, consider paying them salaries before the end of the year if they will have low income in 2016. Salaries must be reasonable given the services performed. A good rule of thumb is to pay them what you would have paid a third party. Also, whenever you pay salaries to your spouse or children, ensure that withholdings for income tax, Canada/Québec Pension Plan, Employment Insurance (where an exemption is not available) and any applicable provincial payroll taxes are remitted as required. These amounts will be reported on T4 slips for 2016, which are due on or before February 28, 2017. Note that the equivalent form to the T4 slip in Québec is the RL-1 slip. RL-1 slips are generally due on or before February 28, 2017.
7. Reimburse personal operating costs on employer-provided automobiles
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 2016, this benefit is equal to 26¢ per personal kilometre driven. 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 2016. For an operating benefit reduction, your payment must be made by February 14, 2017.
8. Contribute to your RESP
You may already be saving for your children’s education by making contributions to a Registered Education Savings Plan (RESP). Each year, when you contribute money to an RESP, the federal government will deposit an additional amount — the Canada Education Savings Grant (CESG) — which is generally equal to 20% of your contribution up to a maximum of $500 (or 20% of a contribution of up to $2,500). If you fail to make a contribution in a year, the unused “CESG room” will be carried forward, but your ability to utilize CESG room in future years may be limited. Consequently, if you are considering making a contribution in the near future, you should try to make this contribution before December 31, 2016. For more information on RESPs, read our Tax Bulletin, RESPs: Saving for Your Child’s Education, or speak to your BDO advisor.
9. Complete sale of corporate assets or transactions involving corporate ECP
On January 1, 2017, new rules are set to take effect that will result in higher income taxes payable by private companies when goodwill or other eligible capital properties (ECP) are sold at a gain. An ECP generally includes goodwill, as well as other intangibles without a fixed lifespan which have been purchased for the purpose of earning income from a business. Other intangible assets that are treated as ECP for tax purposes may include: incorporation costs, customer lists, farm quotas, and franchise rights and licences with an indefinite life.
Currently, when a Canadian controlled private corporation sells an ECP, including a sale of corporate goodwill, 50% of the gain arising on the sale is taxed as active business income at the current federal rate of 15% (or 10.5% if it is eligible for the small business tax rate). In contrast, any resulting gain arising on a sale of the same ECP on or after January 1, 2017 will become subject to tax as a capital gain at the (much higher) federal investment tax rate, which for 2016 is 38.67%. Note that a portion of the tax is refundable if dividends are paid. As you can see, these new rules represent a significant change.
Consequently, if you are currently considering, or are in negotiations for, the sale of the assets of your business, and ECP (such as goodwill, trademarks, or farm quotas) make up a substantial part of the value of the assets being sold, contact your BDO advisor right away. It is important that you take steps to complete any such transactions by December 31, 2016 in order to ensure that the current (and more favourable) tax rules apply to the sale.
For a further discussion of the impact that the new ECP rules may have on your business, read our article titled “Replacement of the Eligible Capital Property Regime” in the 2016-06 issue of the Tax Factor.
10. Purchase capital assets before year-end
If you’re planning on purchasing capital assets for use in your business in the near future, you should consider doing so before the end of the year. Keep in mind that if assets are acquired and in use before year-end, you can claim one-half the usual amount of tax depreciation, or Capital Cost Allowance (CCA), to reduce your business’ income in 2016.
Similarly, if you are an employee who is planning to purchase a new asset to be used in your job, you may want to consider making that purchase prior to December 31, 2016, so as to accelerate your CCA claim by one year. In this regard, you should note that employees are only entitled to claim CCA on three types of employment-related assets — automobiles, aircraft and musical instruments — and only if certain conditions are met.
The rules governing CCA can be complex. If you are contemplating the purchase of a capital asset and have questions about how much CCA you may be entitled to claim, speak to your BDO advisor.
It’s not too late to save on your 2016 taxes
Tax planning doesn’t have to be something that only happens in April. Rather, by investing some time to review your personal tax situation during the year, and especially as you near the end of the year, you may find that there are some easy things you can do to save on your annual personal tax bill.
If you need assistance with your year-end tax planning, contact your BDO advisor. Also, read our Year-End Tax Planning Checklist for more tax-minimization strategies and ideas.
The Information in this publication is current as of November 4, 2016.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.