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Year-End Tax Planning Tips

With the end of the year quickly approaching, below are a few tax tips that businesses and individuals should consider implementing before the end of 2017:

BUSINESSES

2017 Federal Tax Proposals

The role out of the government’s 2017 tax proposals on private corporations has been a significant mess to say the least.  One of the measures that has been proposed relates to “income sprinkling” amongst family members and could adversely affect shareholders of private corporations starting January 1, 2018.  The government has indicated they will issue revised proposals on these measures to simplify the rules later in the fall of 2017, however the actual date is not known at the time of writing this.  If you wait too long there may not be any time to take any action before the end of the year. 

If you have more than one shareholder in your private corporation I would strongly recommend that you seek income tax advice before the end of 2017 (as soon as possible) on how the proposals may affect the shareholders.  Some items to take into consideration would be having a separate class of shares for each shareholder so that different amounts of dividends can be paid on each class of shares.  You may also want to consider increasing dividends in 2017 to shareholders that could be adversely affected by rules for 2018 and later taxation years. 

Below is a very simple example of how the proposed changes could affect shareholders:

Facts:

  1. Husband and wife equally own a construction company in rural Ontario.  Husband works full-time in the business and wife does not work in the business. 
  2. The company earns $100,000 per year and pays corporate taxes at the rate of 10%.  The after-tax income available to pay dividends to husband and wife would, therefore, be $90,000.
  3. The after-tax income of the company is paid out to husband and wife in dividends of $45,000 each per year.
  4. Husband and wife have no other income or deductions to report on their personal income tax returns and are tax residents of Ontario.

Personal Taxes to pay if rules do not change:

Husband: $1,885

Wife: $1,885

Total Personal Tax: $3,770

Personal Taxes to pay if proposed rules go through (effective January 1, 2018):

Husband: $1,885

Wife: $20,385

Total Personal Tax: $22,270

The income tax increase to this family if this tax proposal goes through would be a whopping $18,500 increase, or close to 600%!

Salary/Dividends

You should consider what the salary/dividend mix will be for each shareholder for 2017.  In order for a salary or dividend to be included in an individual’s income for 2017, the dividend or salary must be paid before the end of 2017.  In determining the amount of salary or dividend to pay, there are a number of items to consider, such as, the corporation’s taxable income for the year, the shareholder’s income from other sources, whether or not the shareholder will make RRSP contributions, etc.

Corporate Tax Instalments

For companies with a calendar year-end, you should consider whether or not corporate tax instalments should be continued to be made for the remainder of the year and into the beginning of next year.  If taxable income for 2017 will be considerably lower than in 2016 you may not be required to make further tax installments for 2017 and your 2018 instalment payments could be reduced.  

Capital Equipment

If your company is considering purchasing capital equipment (vehicle, computers, etc.) in the near future and your company has a calendar year end, you should consider purchasing the capital equipment in 2017 versus early 2018.  The company will benefit from a tax deduction for a portion of the cost in 2017, provided the capital asset is available for use before the end of 2017.

INDIVIDUALS

Capital Gains and Losses

Consider delaying the sale of securities with accrued capital gains until the beginning of 2018.

Consider selling securities with accrued capital losses prior to the last settlement date for 2017 to offset any capital gains realized in the current year or to be carried back to capital gains realized in any of the three preceding years.

Mutual Funds

Consider selling mutual funds before year-end and delaying the purchase of mutual funds until the beginning of 2018 to minimize 2017 income allocations from the fund.

Charitable Donations

Consider making any planned charitable donations and political contributions prior to the end of 2017 in order to obtain a tax credit in the 2017 taxation year.

Donation of Securities

If you plan on making a significant charitable donation in 2017, consider donating publicly traded securities with an accrued capital gain instead of donation cash. The capital gain will not be subject to tax, and you will receive a charitable donation receipt equal to the fair market value of the securities donated.

Interest Deductibility

When repaying debt, consider repaying debt for which interest is not deductible for tax purposes.  For example, this could be a mortgage on your home or a loan for an automobile.  If you do have excess cash available that you are considering investing, if the cash is used to repay debt where interest is not deductible, a new loan could then be obtained to purchase non-registered securities in which the interest may be fully deductible. 

Medical Expenses

Consider prepaying eligible medical expenses by December 31, 2017 so the medical expense can be claimed on your 2017 tax return. 

Tax-Free Savings Account Contributions (TFSA)

Consider making a contribution to your TFSA account before the end of 2017.  The 2017 TFSA contribution level is $5,500. 

Consider making any planned withdrawals from your TFSA prior to the end of 2017 instead of early 2018, since amounts withdrawn in a year are not added to your TFSA contribution room until the beginning of the following year.

Registered Retirement Savings Plan Contributions (RRSP)

The maximum RRSP contribution limit for 2017 is $26,010.  You have until March 1, 2018 to make a contribution to your RRSP and receive a deduction in 2017.

Personal Tax Instalments

If your 2017 taxable income will be less than your 2016 taxable income, consider reducing your December 15, 2017 personal tax instalment.

 

 

2018 Federal Budget Passive Investment Income of C...
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