Tax Letters: Tax Tips 2013 – 31 Easily adaptable tax ideas for you and your familyDate: November, 2013
Tax Tips was prepared for the general information of our clients and other friends of Crowe Soberman LLP. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.
Our annual Tax Tips can assist you in your tax planning. It presents some quick ideas and strategies. Please take the time to review your 2014 tax situation and call us for specific recommendations tailored to meet your needs. We will be pleased to work with you on these and other tax-savings ideas.
1. Tax rates are significantly more favourable for dividend income than interest income.
The top personal tax rates in Ontario for 2013 and 2014 are as follows:
|For taxable income over $135,055 but below $509,000||For taxable income over $136,270 but below $514,090|
|Eligible dividends (generally, dividends received from public corporations)||29.54%||29.52%|
|Non-eligible dividends (generally, dividends received from small business corporations)||32.57%||36.45%|
|For taxable income over $509,000||For taxable income over $514,090|
|Eligible dividends (generally, dividends received from public corporations)||33.85%||33.82%|
|Non-eligible dividends (generally, dividends received from small business corporations)||36.47%||40.13%|
Re-evaluate your investment strategy by comparing the pre-tax dividend rates with the pre-tax interest rates using the chart provided on page two.
2. Defer tax on interest to the following year by investing funds for aone-year term ending in the next calendar year.
3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated from the mutual fund.
4. Existing holding companies that have built up refundable dividend tax should consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay the personal tax on the dividend.
5. Changes to the Ontario and Federal Budgets in the 2013 year mean increased personal tax rates on dividends from private corporations in 2014 and beyond. Consider receiving dividends from your private corporation in 2013 rather than waiting until 2014, to take advantage of the relatively lower tax rates in 2013 while recovering the refundable tax balance within the corporation.
Capital gains and losses
6. If you own qualified small business corporation (QSBC) shares or qualified farm and fishing property, you may benefit from the lifetime capital gains exemption of $750,000. This exemption is increasing to $800,000 for dispositions of QSBC shares in 2014 and beyond. The exemption is also scheduled to be indexed to inflation annually after 2014.
7. Consider realizing accrued losses on investments to shelter capital gains realized this year and in the previous three years. Note that a loss realized from the disposition of an investment may be denied if you repurchase the investment within a short period of time.
8. If you have significant trading activity, your sales of securities may be considered a business for income tax purposes.
If your sales of securities is considered a business, your profits will be fully taxable as income (instead of being considered as capital gains taxable at 50%), and your losses will be fully deductible against any other sources of income.
If you are concerned about your sales of securities being considered a business, you can consider filing a one-time, non-revocable election with the Canada Revenue Agency.
This election will treat all of your gains from dispositions of Canadian securities as capital gains (and all of your losses as capital losses) for the current year and all future years.
9. Consider donating publicly-traded securities instead of cash.
A tax-advantaged gift of securities can be made to a private foundation as well as to public charities. Any appreciation in the value of the securities will not be subject to capital gains tax if the securities are donated to a registered charity; or a private foundation after March 18, 2007. There are special rules that apply to persons not dealing at arm’s length with the foundation. For more information, please contact us.
The donation credit (for individuals) or deduction (for corporations) continues to be available for the fair market value of the securities donated.
To avoid capital gains tax on the appreciated securities, the actual securities must be transferred to the charity or foundation (i.e., the gift will not qualify for preferential capital gains treatment if the securities are sold and the cash proceeds are donated).
Similar rules will apply to a capital gain on ecologically sensitive land donated to a conservation charity.
Due to 2011 changes to the tax rules, donation of flow-through securities may trigger a capital gain to the donor.
10. Where possible, maximize interest deductions by structuring or arranging your borrowings first for business or investment purposes, and then for personal use.
Note that the federal government has abandoned the proposed restrictions on the deduction for interest on funds borrowed to make investments in foreign affiliates.
11. Where certain business or capital property (e.g., shares, but not real estate or depreciable property) is lost or ceases to earn income, the interest incurred on the related borrowed money may in some cases continue to be deductible.
Tax-Free Savings Account (TFSA)
12. Canadian residents 18 years of age and older can each contribute up to $5,500 annually, plus any unused contribution room from previous years to a tax-free savings account. Please note:
Contributions to a TFSA are not deductible for income tax purposes.
Interest on money borrowed to invest in a TFSA is not tax deductible.
Contributions to and income earned in a TFSA are tax-free upon withdrawal.
You can give money to your spouse for a TFSA contribution, and the income earned on the contributions in your spouse’s TFSA will not be attributed back to you.
You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you may be subject to a penalty tax for each month that you are in an excess contribution position.
Pensioners, retirees and pre-retirees
13. Income splitting opportunity:
Individuals receiving pension income that qualifies for the pension credit can allocate up to half of this income to their spouse or common-law partner. A determination of the optimal allocation should be considered in tandem with the couple’s continued ability to qualify for Old Age Security payments and certain personal tax credits.
14. An individual’s RRSP must be converted to a Registered Retirement Income Fund (RRIF) or be used to acquire a qualifying annuity by the end of the year
in which the individual turns 71.
An individual who turns 71 in 2013 can make RRSP contributions by the end of 2013, where contribution room is available.
An individual can continue to make a contribution to a spousal RRSP until the end of the year in which his or her spouse turns 71, where contribution room is available.
Quickfacts for 2013
The maximum RRSP contribution limit is $23,820.
The amount of earned income required in 2013 to maximize your 2014 RRSP contribution room is $134,833 (the maximum RRSP contribution limit for 2014 is $24,270).
The small business deduction limit is $500,000.
If you have disabled or infirm dependents
15. The Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents and others save for the long-term financial security of a person who is eligible for the Disability Tax Credit.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59 years of age.
To help you save, the Government pays a matching grant of up to $3,500. You are allowed to carry forward unused grant entitlements for up to ten years.
Contributions that are withdrawn are not included in the income of the beneficiary, although the Canada disability savings grant, Canada disability savings bond, and investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of the RDSP.
There is no annual limit on amounts contributed to an RDSP of a particular beneficiary, but the overall lifetime limit is $200,000.
A deceased individual’s RRSP or RRIF can be transferred tax-free into the RDSP of a financially dependent infirm child or grandchild.
If you have young children
16. Consider saving for your child’s or grandchild’s education with a Registered Education Savings Plan (RESP).
An RESP is a trust arrangement that earns tax-free income to be used to fund the cost of a child’s or grandchildren’s post-secondary education. Contributions to an RESP are not deductible for tax purposes and withdrawals of capital from the RESP are not taxed. The beneficiary is taxed on the income portion when withdrawn from the RESP for the purpose of funding his or her post-secondary education. While at school, the child or grandchild tends to have relatively low sources of other income, and, as a result the income is usually taxed at lower rates, if at all.
For RESP contributions in 2013:
There is no annual contribution limit, the lifetime contribution limit is $50,000 per beneficiary; and a federal government grant of 20% of annual RESP contributions is available for each beneficiary under the “Canada Education Savings Grant.” The maximum annual RESP contribution that qualifies for the federal government grant is $2,500.
17. Maximize child-care expense deduction and consider the federal Children’s Fitness Tax Credit, the Ontario Children’s Activity Tax Credit, and the Children’s Art Tax Credit.
If you have a child under the age of 16 enrolled in a program of physical activity, you may be able to claim up to $500 of related expenses under the non-refundable federal children’s fitness tax credit. Costs eligible for the credit include costs for administration, instruction, rental of required facilities, and certain uniforms and equipment.
The maximum amounts deductible for child-care expenses are $10,000 for a disabled child, $7,000 for children under age seven, and $4,000 for other eligible children (generally, children age 16 and under). In most cases, the spouse with the lower net income must claim the child-care expenses against their earned income.
You will not be able to claim the expenses incurred for the child’s physical activity program for both the child-care expense deduction and the children’s fitness tax credit.
If you have a child enrolled in a qualifying activity, you may be able to claim up to $535 of eligible expenses under the refundable Ontario children’s activity tax credit. You may receive a refundable tax credit worth up to $54 per child less than 16 years of age or up to $107 for a child with a disability less than 18 years of age. This tax credit covers eligible fitness and non-fitness activities.
If you have a child enrolled in a prescribed program of artistic, cultural, recreational or developmental activity, you may be able to claim up to $500 of eligible expenses under the non-refundable Children’s Art Tax Credit (CATC). You may receive a non-refundable tax credit worth up to $75 per child under 16 years of age, or up to $150 for a child with a disability under 18 years of age. Costs eligible for the credit include costs of registration or membership, including administration, instruction, and the rental of facilities or equipment.
18. Remember to apply for the Universal Child Care Benefit (UCCB) program:
Under this program, families will receive up to $1,200 per year for each child under the age of six, paid in instalments of $100 per month per child.
The UCCB payments that a family receives will be taxable to the lower income spouse.
A single parent can designate the amount of the UCCB payments received to be included in the income of a child to take advantage of the child’s lower tax
Income splitting opportunity:
If you decide to transfer the UCCB payments to a child, any income earned on the payments by that minor child will be taxable to the child, not the parent. If the child’s taxable income is below $11,038 in 2013, the income will not be subject to federal or Ontario tax.
19. It is also important to apply for the Canada Child Tax Benefit (CCTB):
Apply as soon as the child is born, as the CRA makes retroactive payments up to only 11 months prior to the application.
The CCTB is a tax-free monthly payment for children under the age of 18.
Both shared custody parents are recognized as “eligible individuals” in the same month for the purposes of the CCTB. This enables both parents to equally
share the benefit each month rather than being subjected to the previous six-month rotational basis.
If you have your own corporation
Consider your optimum salary/dividend mix to achieve less overall tax:
Salary will qualify you and other family members active in the business for RRSP contributions, Canada Pension Plan (CPP) contributions, and child-care deductions. Dividends will not qualify an individual for these contributions or deductions.
Dividends, on the other hand, may cost the family unit less in current taxes. Each family member, over 17 years of age and receiving dividend income of approximately $39,500 or less of non-eligible dividends, or $51,000 or less of eligible dividends, from taxable Canadian corporations, will pay little or no income tax, but will pay a small Ontario Health Tax premium. The tax on split income eliminates the tax benefits of paying dividends to children under
18 years of age.
Consider accessing funds from the corporation that can be withdrawn tax- free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares,or roll in personal assets with a high cost base to the corporation on a tax- free basis to extract the cost base of the assets on a tax-free basis.
21. Consider instalments for 2014:
The threshold above which corporations must pay income tax, GST and source deductions instalments is $3,000. The threshold will be based on 2013 tax amounts payable.
Certain Canadian-controlled private corporations are allowed to make quarterly, instead of monthly, income tax instalments. To qualify, certain conditions must be met, including the following criteria relating to the 2013 taxation year:
The corporation was entitled to the small business deduction;
The taxable income of the associated group did not exceed $500,000; and
The taxable capital of the associated group did not exceed $10 million.
Instalment planning for 2014 can be addressed during 2013 by meeting the conditions where applicable.
If you are self-employed…
22. If you have a home office and you meet certain conditions, you can deduct eligible home office expenses, including a portion of your mortgage interest, home insurance, property taxes, utilities and minor repairs.
23. Consider the potential benefits of incorporating your business.
If you are employed…
24. Reduce tax withheld at source:
If you will have large tax deductions available to you (e.g., RRSP contributions, tax shelters, interest, business losses, work related car expenses, or alimony), apply in advance to the CRA for a reduction of the payroll withholdings that are withheld from your salary.
You may also arrange for a reduction in tax withholdings if you are entitled to the Child Tax Credit of $2,234 for each child.
25. Minimize taxable employee benefits:
Arrange to receive non-taxable benefits from your employer instead of taxable benefits where possible. Examples of non-taxable benefits include: employer contributions to a registered pension plan (the pension is taxable whenyou receive it); and contributions to a “private health services plan,” such as those covering medical expenses, hospital charges and drugs not covered by public health insurance and dental fees.
If your employer provides you with an automobile…
26. The taxable benefit is based on original cost of the automobile and does not decrease as the car ages. Consider purchasing the car from the company by way of an interest- free loan from your employer and personally claiming depreciation on the car.
Working in the U.S.
27. A Canadian resident who works in the U.S. may deduct contributions made to a U.S. pension plan, under certain circumstances, up to the taxpayer’s RRSP deduction limit. This will reduce the individual’s unused RRSP contribution room.
Income splitting with family members – other opportunities
Consider the following legitimate means of shifting income to family members whose taxable income is below the lowest tax bracket, approximately $43,500. This will allow them to take advantage of certain non-transferable credits, as well as lower tax rates.
28. Income splitting with children over the age of 17 (“adult children”):
Shift investment income by gifting money to your adult children or to a trust for their benefit, if you wish to maintain control.
Lend money to your children with actual interest payable at the prescribed rate. Earnings in excess of this rate will be taxed in their hands.
29. Income splitting with adult or minor children:
Purchase appreciating assets in the names of your children regardless of their ages. Capital gains will be taxed in their hands, not yours.Earnings in excess of this rate will be taxed in their hands.
30. Income splitting with your spouse or common-law partner:
Lend money to your spouse or common-law partner to earn business income.
Have the higher-income spouse or common-law partner incur all household expenses, thus allowing the lower income person to acquire investments, which could be taxed at a lower rate.
Lend money to your spouse or common-law partner with actual interest payable at the prescribed rate. Earnings in excess of this rate will be taxed in your spouse or common-law partner’s hands.
31. File and pay your taxes on time
Even if you are receiving a refund, you should file your taxes on time. Filing on time avoids the possibility of late-filing penalties that may be applicable on CRA reassessments.
The deadline for filing your 2013 personal tax return is Wednesday, April 30, 2014. If you, or your spouse or common-law partner, are self- employed, the deadline for filing your tax return for 2013 is extended to Monday, June 16, 2014. Regardless of your filing due date, if you have a tax balance owing for 2013, you still have to pay the balance due on or before April30, 2014.
The penalty for late filing your return is 5% of the unpaid taxes, plus an additional 1% for each complete month your return is late (up to 12 months). Penalties are higher for repeat offenders or gross negligence omissions.
Highlights of the Canada Pension Plan (CPP) and Old Age Security (OAS)
Canadian Pension Plan (CPP)
Effective January 1, 2012, there have been some noteworthy changes to the CPP, which include the following:
- If you are an employee between the ages of 60 and 65 and you are still working, you must continue to contribute to the CPP even if you are already receiving a CPP retirement pension.
- If you are an employee between the ages of 65 and 70 and you are still working, you can choose to continue to contribute to the CPP or you can opt out of making these contributions.
- Any contributions you make to the CPP, regardless of your age, will increase your CPP benefits even if you are already receiving a CPP pension benefit.
- You will be able to receive your CPP retirement pension without any work interruption.
- Your employer must match your CPP contributions in each of the scenarios described in (1) and (2) above. Your employer must make these contributions regardless of whether you are already receiving a CPP pension benefit.
Old Age Security (OAS)
- The value of the Old Age Security (OAS) benefit for eligible seniors over the age of 65 is approximately $6,600 per year (indexed quarterly for inflation) but is generally reduced where net income exceeds $70,954 and is completely eliminated where income exceeds $114,793.Beginning July 1, 2013, you may choose to delay receipt of your OAS for up to five years beyond the normal benefit start date of 65, in exchange for an increased monthly pension of 0.6% (up to a total of 36% annually) for each month that the benefit is delayed.
If you have already started receiving OAS payments but would like to benefit from the deferral, you can write to Service Canada to request a cancellation of your OAS pension, provided you have been receiving the pension benefits for less than 6 months, but you will have to repay the benefits you have received to date.
Investment income – A closer look…
It may be a good time for you to consider whether your investment income is tax efficient and consider investment alternatives.The table below has been prepared to assist you in this matter. It assumes that your investment goal is to earn anafter-tax rate of return of 5%.It compares the pre-tax yield required to achieve a 5% after-tax rate of return by earning:
- Interest income;
- Eligible dividends (generally dividends received from public corporations); or
- Non-eligible dividends (generally dividends received from small business corporations.
|If your total taxable income is:||The pre-tax rate required to achieve a 5% after- tax rate of return is approximately:|
|If you receive interest income||If you receive eligible dividends||If you receive non-eligible dividends|
|Between $1,000 and $43,600||5% – 6.6%||5% – 5.2%||5% – 5.4%|
|Above $43,600 but below $87,100||7.3% – 8.3%||5.8% – 6.2%||6% – 6.6%|
|Above $87,100 but below $135,000||8.8%||6.7%||7%|
|Above $135,000 but below $509,000||9.3%||7.1%||7.4%|
Click here to download a copy of the tax letters (PDF).