Peter Wiesner, CPA, CALicensed Public AccountantCopyright @ 2019
November 20, 2019
Tax Planning Time - Q4 2019
Here are some year end tips that will save you money from the tax department. However, they are time sensitive and important to do at this time of the year as follows;
Income Tax InstallmentsIf you owed more than $3,000 in tax upon filing your personal tax return for 2018, you may have received a notification from Canada Revenue Agency (CRA) requiring you to pay tax instalments for 2019.
If you have not made these instalments and will owe tax after your withholding taxes on salary are accounted for, you should make payments September 15th and before by December 15, 2019. If the September 15th payment
is late than make the next payment earlier by the same number of days, as the first payment was late, in order to offset interest charges. This will reduce or avoid instalment interest and penalties being charged.
Tax-loss sell your capital losses in your portfolio.Calculate the capital gains you have realized for 2019 and then sell stock losses not yet realized.Identify and sell investments that are in a loss position. Trades entered before December 24th will settle funds in the account prior to December 31, 2019.Net your capital losses against capital gains on your 2019 personal income tax return.
Note that it's important that any tax-loss selling strategies you use account for the “superficial loss” rules, which will deny any capital losses if the investments are repurchased within 30 days (being a specified time period).
So don’t repurchase the identical products sold within 30 days.
Tax-Free Savings Account (TFSA):Contribute to your TFSA. The TFSA limit for 2019 is $6,000. Keep in mind that TFSA contribution room accumulates if not used, so you may be able to top up your TFSA if prior contributions were missed. Check with the CRA to verify your unused contribution room. I can do this for clients.
Withdraw funds from your TFSA if needed before December 31, rather than waiting until 2020, since a withdrawal in 2019 will be added back to your TFSA contribution room on Jan 1, 2020.
Add $6,000 on January 1, 2020 to your TFSA and get those dividends, interest, and capital gains growing tax free sooner than later. Please note that any stock or capital losses in your TFSA have no tax value to you on your personal income tax return and so only buy quality products for long term growth and appreciation. Also, no day trading is allowed in a TFSA.
Registered Retirement Savings Plan (RRSP):
Consider withdrawing funds from your RRSP by year-end if you are in a low tax bracket for the 2019 tax year.
If Your Age 71 Remember to Convert to RRIF by December 31, 2019.
If you are age 71 this year, you must convert your RRSP to a RRIF by December 31, 2019 or else a large penalty arises. Also, you must begin taking minimum withdrawals next year from a RRIF.
Consider the following for your RRIF:Using your younger spouse’s age for minimum payment calculations. You can choose the age of your younger spouse and say your spouse is 17 years younger (spouse’s age) the minimum withdrawal schedule would be for a 55 year old vs a 72 year old making it effectively seventeen years younger for the purpose of calculating the minimum withdrawal amount from the RRIF. Not many people are aware of this.Please note that the mandatory age to convert an RRSP to a RRIF is an arbitrary setting set by the government at age 71. The government has simply created a universal withdrawal schedule for you at age 72. You must start withdrawing at the latest age of 72 and the funds will be depleted at around age 98 if you follow the minimum schedule exactly. However, those with younger spouses can use a lower minimum withdrawal amount. It’s all about delay in paying those taxes.
Making an advance contribution to your RRSP by December 31, 2019 for earned income from this year while you are age 71. You are still allowed to make a deductible contribution in the year before you turn 72 with no RRSP room if you are working at age 71, but you can’t deduct it yet. The tax deduction happens in 2020 on your tax return, but this RRSP purchase should be completed in December 2019 and for the cost of a 1 month RRSP penalty at 1% for the over contribution. Also, a penalty form is required and is due March 31, 2020 for 2019. However, it’s a minor cost to get one more year of RRSP contribution while you’re working at age 71. It’s all about delay in income taxes.
Make Charitable donations
Donating qualifying securities instead of cash can increase your tax savings. The capital gain is eliminated and you get a donation at fair market value.Under normal circumstances, when you sell a publicly traded security, you are subject to income tax on 50% of the increase in value or capital gain. However, when you donate an appreciated investment to a registered charity, you don’t have to pay tax on any of the gain – the inclusion rate in income is 0%. The securities have to be held in non-registered portfolios – they cannot be held in registered, tax-sheltered holdings such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
On the flip side, selling securities in an open account at a capital loss will also provide additional deductions against capital gains and if the security is in a loss position then sell them first and get the cash, and then donate the cash.
Political Donations to Federal and Ontario Parties in 2019 FederalFederal political contributions are donations that were made to a registered federal political party. You can receive up to 75 percent of your first $400 of donation as credit, followed by 50 percent of any amount between $400 and $750 and 33.5 percent of amounts over $750. The maximum amount of the credit is capped at $650 or at $1,275 in total Federal contributions annually.Ontario Donations The rate is:75 per cent on the first $415 of donations in 201950 per cent on the portion of your donation between $415 and $1,384 in 201933.33 per cent on the portion between $1,384 and $3,149 in 2019. You have charity limits of $1,600 to party annually, $1,600 to candidate at times of election, and $1,600 to the riding association annually. Do your donations always by December 31, 2019.
RESP and RDSP Plans
Contribute to your child’s Registered Education Savings Plan (RESP) or Registered Disability Savings Plan (RDSP)
RESPThe government matches 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200,
up to age 18. If you don’t contribute enough to qualify for the maximum $500 CESG in a given year, the unused entitlement can be carried forward to the next year.
For every $1 put in an RDSP account, the federal government can (if your family income is below $95,259) match with up to $3! This is the Canada Disability Savings Grant.For people living on a low-income (less than $31,120), the federal government will put in $1000 each year for 20 years! This is the Canada Disability Savings Bond.For people living on an income between $31,120 – $47,630 they can still receive a partial bond.Anyone can contribute to an RDSP- family, friends, neighbours. It allows people who want to help a way to do so!The money can be invested to grow- we have heard that it is the best Return on Investment available. Depending on someone’s income, any money saved immediately triples in value. Once investment decisions are made, it can really start to grow!
The RDSP is exempt from most provincial disability and income assistance benefits. It does not get clawed back and it does not reduce disability benefits payments.Both money held in an RDSP (asset) and money taken out of an RDSP (income) are fully exempt from determining eligibility for Disability Benefits in Ontario.People with disabilities can choose what to do with the money when it comes out- there are no restrictions on how the money can be spent!
Buy RRSP’s On or Before February 29, 2020
A RRSP or a spousal RRSP contribution should be made prior to February 29, 2020 to be deductible on your 2019 tax return, subject to your RRSP contribution limit found on your Notice of Assessment.
The dollar limit for RRSP contributions for 2019 is $26,500 plus any prior year carry forwards.
Please note that the RRSP contribution limit for 2020 has increased to $27,230 (subject to your 2020 deduction limit).
Home Buyer and Life Long Learning Plans
If you have an outstanding balance under the Home Buyers’ Plan or Lifelong Learning Plan, the minimum annual repayment has to be made by February 29, 2020 for 2019. Otherwise, it will be taxable on your 2019 personal tax return. So purchase those RRSP’s for the repayments.
Income Splitting Loans with Spouse Before December 31, 2019Consider whether you wish to enter into an income splitting loan prior to this date in order to take advantage of the CRA’s 2% interest rate which is the prescribed rate. The CRA’s prescribed rate is revised quarterly and will stay at 2% until December 31, 2019.There will be no changes to the CRA prescribed income tax interest rates for taxable benefits, overpaid taxes and underpaid taxes from the third to the fourth quarter of 2019 (October 1, 2019 to December 31, 2019). Also, you must pay the prescribed Loan Interest by January 30, 2020 for 2019.Remember to pay the interest on prescribed rate loans (e.g., spousal income splitting loans) prior to January 30, 2020 to avoid the income attribution rules from applying.
Tax Reform 2018 targeting Canadian private corporations Here are some of the key areas that may affect you:Reduced small business tax rates – 9% for 2019 Federal and 3.5% Ontario = 12.5% overall Ontario corporate tax rate on the first $500,000 of earnings.Reduced Small Business Deduction (SBD) limit when passive income exceeds $50,000 your holding company or any other associated company. So once this passive income hits $150,000 in annual earnings your Small Business Tax Deduction is gone.
This could cost you 14% on $500,000 in Ontario or $70,000. This is a significant extra tax cost for owing a successful holding company that is likely holding your retirement assets as a self employed business person. Consider assets that have capital gains in the future and reduce dividends and interest received in the short term. As the Liberals have been elected in a minority situation, these rules will remain in place as the double tax would be supported by the left leaning miniroity government partners. Only the conservatives oppose this double tax situation and they are the official opposition.
Rules to minimize income sharing – Tax on Split Income (TOSI) with family members
When considering whether dividends on private company shares are effectively excluded from the TOSI rules, it may be easier to qualify for the excluded business exception as it provides a “bright-line” test.Prove you have worked an average of 20 hours a week in the business in the current year or in 5 previous taxation years and the TOSI rules do not apply. The excluded shares exception has also been provided as a bright-line test for individuals 25 or older.
However, with multiple conditions to meet, it appears limited to non-service businesses earning income from third parties with simple direct shareholding structures. The excluded shares exception will be difficult or impossible to access by individuals in many family business structures that use holding companies and trusts, or that earn service income or income from a related business. If you can’t meet one of these two exceptions and are 25 years of age or older, then your dividends can still be excluded and not subject to the TOSI rules, but it will require you to prove a reasonable return — a much harder task.
Note that for adult family members aged 18 to 24, there are further restrictions on what exclusions may apply to avoid the TOSI rules. If a family member in this age group doesn’t qualify for the excluded business exception (as discussed above), then it will be necessary to determine if they contributed capital to the business as this may allow for another exclusion to apply. These include an exclusion for a safe harbour capital return or an exclusion for a reasonable return in respect of contributions of arm’s length capital made by the individual in support of the business. These are more limited exclusions, making it more difficult for this age group to avoid TOSI.
Thus, tax planning has become far more complicated in the last four years and the government has been increasingly targeting taxpayers on the personal and corporate sides looking for extra tax funds.
Thus, minimizing your taxes are more important than before in order to keep the government from receiving the top tax rate of 53.53% in Ontario on your hard earned income.
If any questions or comments arise, please contact me (Peter Wiesner CPA, CA) at 905-898-3355