By David Rotfleisch
Special to the Financial Independence Hub
Want to pay less tax? The year-end brings with it legitimate, allowable opportunities for tax planning that can lower your taxes payable to CRA.
1.) Timing of Expenses
Taxpayers in business should accelerate expenses to make purchases that can be deducted this year rather than waiting for 2016. Employees are entitled to write off depreciation on cars, planes, and musical instruments. Tradespersons and apprentices are permitted to deduct the cost of their tools up to a prescribed limit. Individuals planning on purchases should do so late in the year, to enjoy the benefit of depreciation claims this year.
Plan to purchase any capital property before the tax year-end to be able to claim CRA deductions (at 50% of full rate) this year. Furthermore, until Dec 31, all manufacturing and processing (M&P) equipment qualifies for a 50% straight line depreciation rate which allows for faster write off then the normal declining balance that will kick in on Jan 1.
RRSPs are a key tool for tax planning and allow Canadians to receive a deduction for the amount contributed, while also allowing the capital to accumulate tax-free until retirement.
Even though the deadline is February 29, 2016, taxpayers should contribute to their RRSPs as soon as possible for compounded growth.
3.) Open Tax Free Savings Accounts
While deposits to a TFSA are not tax deductible like RRSPs, accrued profits in the account are not subject to tax when earned or when withdrawn.
4.) RESP Contributions
Registered Education Savings Plans are a great way to save money for a child’s education, and offer tax incentives. The amounts contributed to the plan are not tax deductible; however, the funds themselves accumulate tax-free. The government also provides a grant equal to 20% of the contribution up to a maximum of $500 per year and $7,200 over the life of the account.
5.) Plan for Retirement
If taxpayers turn 71 in the current taxation year, they must convert the RRSP to a Registered Retirement Income Fund or an annuity no later than December 31, or the full market value of the RRSP will be added back into the income for that year.
6.) Capital Losses
Investors with capital losses can utilize them to reduce gains for 2015. They may be carried back to offset gains from previous years to allow a refund of previously paid taxes. If you own securities that have gone down in value, consider selling before December 24 to trigger a loss.
7.) Allowable Business Investment Loss (ABIL)
If a taxpayer has an ABIL, a loss on shares or a debt with a small business, it can be utilized to reduce overall taxable income. Ensure that shares have been sold or clearly establish the write-off of a bad debt that is uncollectible.
8.) Small Business Deduction
Canadian Controlled Private Corporations (CCPCs) with active income of less than $500,000 can claim the small business deduction. An essential tax strategy for corporations with active income in excess of $500,000 is to declare a bonus to a shareholder of the company to reduce income to $500,000. The bonus must be paid within 180 days of the company’s year-end.
9.) Charitable Donations
Donors should review their anticipated donations for the first quarter of the next taxation year and consider donating before the end of 2015. Taxpayers can also donate shares of publicly traded corporations to charity and reap enhanced tax benefits since there are no capital gains upon donation of the shares to the charity.
10.) Benefit from a New Lower Tax Rate
If your company qualifies for the small business rate and has a December 31 year-end, then by deferring sales until 2016 you’ll benefit from a lower tax rate of 10.5%, compared to the 11% in 2015.
11.) Give Employees Non-taxable Gifts
Non-taxable gifts of up to $500 annually and non-cash long-service and anniversary awards (also under $500 annually) can be given to arm’s length employees and can still be deducted as business expenses.
12.) Pay Salaries to your Spouse/Family Members
Business owners are entitled to pay reasonable salaries to family members who work for the business, thereby splitting income and bringing down the overall family tax rate. It also provides family members with contribution room in their own RRSPs. Proper books and records are required in case of an audit.
13.) Delay Purchases of Mutual and Equity Funds
Investors buying mutual funds should consider waiting until the beginning of 2016. Mutual and equity funds usually make distributions once per calendar year. Anyone who purchases these funds now will be allocated a full year’s worth of income for taxation purposes.
14.) Utilize the New First-Time Charitable Donor Tax Credit
Temporary rules for 2013-2017 offer an additional 25% of tax credit up to a limit of $1,000 for charitable donations made by a donor who has never previously claimed a charitable donation. Since this first-time credit will only be available to a donor once, save up all planned charitable donations for two or more years to take advantage of the additional credit in one year.
15.) Optimize Your Compensation Strategy
A compensation strategy normally includes a combination of salary, bonuses and dividends. Bonuses allow payment to be deferred until after year-end. If income is expected to exceed $200,000 in 2016, consider paying bonuses and dividends before the end of 2015 to avoid a possible increase in the top rate of tax promised in the recent election campaign.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based boutique tax law firm. With more than 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 email@example.com