It’s that time of year again ….
Generally, December 31 marks the deadline for transactions that you can incur that will affect your taxable income position for the year. While tax planning strategies should be considered throughout the calendar year, it is possible to establish some beneficial strategies may reduce your taxable income position for 2005. As November 2005 nears a close, that time is now.
Every situation is different. Before you can come up with any Year End Tax Planning Consideration, it is a good idea to just pull out your last year’s Personal Income Tax Return and have a good read. I’ll try to mention a few strategies, although keep in mind that not all strategies are appropriate for every taxpayer and individual. Here’s a refresher course on what your 2004 personal income tax return looked like:
Page 2 – Calculation of your Total Income
* This is where your Gross Income is derived from…
Page 3 – Calculation of your Taxable Income
* Reconciliation of your Gross Income to your Net Income, and then
* Reconciliation of your Net Income to your Taxable Income
* Employees are T4’ed for amounts received during the calendar year, not accrued. If you have a lump sum owing, you might consider delaying receipt of payment until after January 1, 2006
* Employees are subject to taxable benefits for interest free (or reduced) employee loans and use of employer’s automobile, less any amounts repaid
* Employees are allowed to deduct certain expenses and acquire certain assets, provided it is a condition of their employment (T2200). Purchase assets eligible for capital cost allowance (CCA) before the year end is over
* Pension income is taxed on the amounts received. If you have control of the distribution of your pension plan payments, this could be one way of deferring income into 2006. Generally, at least $1,000 should be withdrawn because in most cases you will be entitled to a Pension Income Amount federal non-refundable tax credit.
* Review the mix of investments and timing of earnings in your portfolio. Everything paid will be taxable and you will receive an income slip. Sometimes earnings accrued will also be taxable, even though you did not receive anything. Canada Savings Bond may be accrued on November 1 … Hydro bonds are paid June 15, December 15, etc… Mutual funds tend to distribute and reinvest dividends and earnings late in December … Sometimes you may purchase a bond at a market price, and receive full coupon bond interest payment.
* Capital gains are taxed at 50% – but do you have any losses? If you have capital gains, there may be a few ‘duds’ in your portfolio that can trigger a capital loss that can reduce your gain. If you think the downslide is temporary, wait 30 days and buy it back. If you buy it back (or transfer to a spouse etc) within 30 days, the loss may not be counted in most cases.
* You can deduct investment loan interest against investment income earnings. You cannot deduct mortgage interest and personal loan interest that is paid in the year – just because you have investments. It might be a good strategy to pay off the non-deductible interest loans and reinvest with deductible interest loans. That is, if planning to buy investments before the year is out, instead of paying cash – pay off your line of credit and take a loan.
* Income is normally on the “Accrued Basis”, not cash basis, except for certain situations. It’s also ‘okay’ to accrue expenses. Keep in mind, that the expense must be incurred within 2005, even though you may not pay it until 2006.
* Income splitting – can you pay your family members any wage? Keep in mind, that they actually have to work for you and it is reasonable. There are many times that family businesses have members work in the business, but take no wage. Be careful about just paying i.e. your 2 month old child and other kids who do not work in your business. The strategy would be to reduce your income levels from one tax bracket down to a lower tax bracket, but under a watchful eye.
* If considering purchasing assets, consider purchasing prior to year end. In the year of acquisition, only 1/2 of the amount may be claimed for capital cost allowance (CCA). This includes if you buy something on December 31, 2005 – you receive the same amount of CCA as if you bought it last January 1, 2005
* If your business is incorporated, and you receive a wage or management fee (business income) from your corporation, there maybe be opportunities to mix up your income, between salaries and dividends. There recently is a proposed dividend taxation policy change on the table. You can declare dividends and even record payment as a credit to your shareholder loan, if there is not enough cash around. If there is investment income in your corporation, you may be eligible up to $1 refund for every $3 taxable dividend paid out of the corporation. Generally, I tend to recommend either two strategies – towards wages that either maximize CPP contributions in the latter years close to retirement, or enough to be ‘earned’ income to be eligible for other deductions (child care, build up RRSP contribution levels, etc) Every client is different.
* Do you have a shareholder loan in a corporation and owe money to the corporation? (debit balance) You are not allowed to owe a corporation two years in a row, without consequences. Debit balances created by drawings maybe deemed to be wages and taxed 100%, or a deemed sec 80.4 interest calculation at prescribed rates may have to be added to your income. You generally want to reduce the loan from the company and have a loan to the company (credit balance)
Deductions from income
* RRSP’s can be purchased up to 60 days after the year end, which is March 1, 2006 deadline to include a deduction against your 2005 income.
* Most other deductions should be incurred prior to the calendar end, including donations, child care expenses, alimony, medical expenses, etc.
I can probably go on and on and on in any of the above points, either to qualify my statements or to expand them. But, I hope that the above points will be something to consider. You can make a difference in your own affairs. But, don’t take my word for it – you should discuss this with your OWN accountant and/or tax preparer or even your financial planner consultant. If you don’t have one = consider obtaining professional advice. You may also obtain information directly from Canada Revenue Agency’s website