By David Rotfleisch
Special to the Financial Independence Hub
While tax season for calendar 2015 is just around the corner, the best time to influence your tax position for calendar 2016 is: right now. Here are the “Top 10” early tax planning tips for 2016 to help reduce your tax, contribute to your RRSP, help out family members, and also support your favourite charities.
- Adjust Source Deduction amounts
Salaried employees have income tax deducted by their employers from each pay cheque. The amount of these deductions is computed on the assumption that the employee is only entitled to the basic personal exemption. Taxpayers with other exemptions such as children can fill out and give their employers a CRA form TD-1 http://www.cra-arc.gc.ca/E/pbg/tf/td1/README.html showing other deductions to which they are entitled, thereby reducing the amount of taxes that will be deducted at source. For deductions that don’t appear on the TD-1 form, such as spousal support payments or RRSP contributions, form T1213 Request to Reduce Tax Deductions at Source http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html can be submitted to CRA.
- Contribute to an RRSP as Soon as Possible
While many Canadians contribute to their RRSPs in the first 60 days of the year, the earlier the contribution is made, the more the RRSP benefits from the effects of compounding. If you don’t have a lump sum to make your annual contribution at the start of the year, consider making regular monthly payments. The RRSP limit for 2016 is the lesser of 18 per cent of 2015 earned income or $25,370.
- Income Splitting
The attribution rules mean that you can’t income split with a spouse or child simply by transferring assets. However, you may still be able to carry out income splitting tax planning by benefitting from the historically low prescribed income tax rate, which is at one per cent until at least March 31. If you have a spouse or child in a lower tax bracket than you, consider the prescribed rate loan tax planning strategy whereby you as the higher-income spouse lend funds to the lower-income spouse or child to invest in income-producing assets. Provided loan interest is paid the attribution rules will not apply, and the income earned will be taxed in the hands of the lower rate family member.
- Home Accessibility Tax Credit
The home accessibility tax credit was announced in the 2015 federal budget and starts this year, 2016. If you’re a senior or a person with a disability (or family member who lives with them), and are thinking of renovating your home, you should plan to claim new home accessibility tax credit. It’s a non-refundable credit that provides federal tax relief of 15 per cent on up to $10,000 of eligible expenditures per calendar year, per qualifying individual, so is worth $1,500 annually, or $3,000 for a couple.
- Registered Education Savings Plan (RESP)
If you contribute least $2,500 to an RESP the government will contribute $500 to your child’s education through the Canada Education Savings Grant. You may also be able to catch up on missed Canada Education savings grants from prior years.
- Plan for Retirement
If are turning 71 this year, you must convert your RRSP to a Registered Retirement Income Fund (“RRIF”) no later than December 31. But you should starting looking into your options beyond a RRIF now; you can choose to receive an annuity, a lump sum payment or a combination of these options. If you have a spouse, consider creating a spousal RRSP so that you can contribute to the spousal plan until your spouse reaches 71, provided you have unused contribution room left on your personal RRSP account.
- RRSP Meltdown Strategy
An RRSP meltdown is a complex income tax planning strategy involving deregistering part of your RRSP annually and offsetting the RRSP income inclusion by an equivalent interest expense deduction. This requires that a bank loan be taken out and be used to acquire a non-registered stock portfolio. Since the interest on the loan is fully deductible, a portion of the RRSP equal to the interest deduction is deregistered annually. The earlier in the year this strategy is put in place the more deduction and deregistration will be available.
- Pay Salaries to Spouse/Family Members
Business owners are entitled to pay reasonable salaries to family members who work for the business. This is an effective income splitting technique and brings down the overall family income tax rate. It has the additional benefit of providing family members with contribution room in their own RRSPs.
- Charitable Donation Planning
It’s a good idea to plan now for your annual charitable donations. There are two tax planning strategies to consider. Donating appreciated securities directly to a registered charity has the benefit of eliminating tax on any accrued capital gains while giving you a donation tax credit. There is a “super credit” available for the taxation years 2013-2017 of an additional 25 per cent tax credit for charitable donations made by a taxpayer who has never claimed a charitable donation in the past. Since the first time credit will only be available to any taxpayer once, save up all planned charitable donations for two or more taxation years to take advantage of the additional credit in 2016 or 2017. The “super credit” is only available up to a limit of $1,000.
- Non-taxable Gifts to Employees
A non-taxable gift of up to $500 in any year and non-cash long-service and anniversary awards (also under $500 annually) can be awarded to an arm’s length employee and can still be deducted from taxes as business expenses.
David J Rotfleisch, CPA and JD, is the founding tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. www.Taxpage.com and firstname.lastname@example.org