Tax planning review end of the year is also a good time to reassess and review whether you’re achieving the most effective tax savings opportunities for the future in:
- Your tax rate
- Your tax-assisted savings strategy
- Your other investments
- Your family tax planning
- Your trust arrangements
- Claiming your credits and deductions
- Special situations.
Review your your personal marginal tax rate
You should consider your personal marginal tax rate and that of your business, registered retirement savings plan (RRSP) contribution room (a salary of $132,333 in 2012 provides the maximum in contribution room for 2013), and provincial health or payroll taxes. For example, it is always a good strategy for tax planning to onsider the optimal mix of salary and dividends for 2013. However, there’s no best answer here for everyone.
As a general rule, if you don’t need the cash and your company has a lower tax rate than you, consider leaving the cash in the corporation. Finally, if you live in Ontario, don’t forget about the new, high-earner tax on income over $500,000; you might consider deferring the payment of salaries, bonuses and dividends until the tax is repealed, which has been promised by the government.
Higher income taxpayers who live in Ontario and Quebec may see a significant increase in their tax rates for 2013. The Ontario government created a new income tax rate for individuals who earn more than $500,000 a year. These individuals will see their rates increase to 49.5% (from 48.0%) for 2013. The Quebec minority government proposed a new rate of 50% (from 48.2%) for Quebec taxpayers who earn more than $100,000. These proposed Quebec rates are expected to be confirmed in the province’s budget on November 20, 2012.
Your tax-assisted savings strategy
All tax-assisted savings plans can offer significant tax benefits for your investment savings. However, contribution limits and the tax treatment of contributions and withdrawals vary between the plans. Which plans you choose for your savings to earn interest and grow in a tax-free environment will depend on your circumstances.
Generally, if you have enough resources, you should invest in all the relevant plans. For many Canadians, the most relevant plans will include Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA). Both these plans can help you save for retirement or other reasons but it’s important to note the differences between them.
Your other investments consider tax loss selling
If you own investments with unrealized losses, consider selling them before year-end to realize the loss and apply it against your capital gains realized during the year or in a prior year. You may benefit from this technique, known as tax loss selling, if you realized capital gains in 2012 or you reported taxable capital gains in one or more of the last three years. The more capital gains tax you paid in the last three years, the more you should consider the tax advantages of tax loss selling before the end of the year so you can carry back the losses to offset those gains (bearing in mind that tax considerations are only one of many factors that should influence your investment decisions).
If you engage in tax loss selling, make sure you don’t run afoul of the special tax rules designed to stop the artificial creation of tax losses. For example, a capital loss will be disallowed if you own or buy a similar property 30 days before or after the sale and if you, your spouse or a corporation you control still holds that similar property 30 days after the tax loss sale. Remember that most stock and bond transactions normally “settle” three business days after the trade is entered. Because weekends and public holidays may affect the determination of “business days”, if you intend to do any last-minute 2012 trades, consider completing all trades before Christmas and be sure to confirm the settlement date with your broker.
Pay salaries to family members
If a family member has provided services to your business, consider paying them reasonable salaries or bonuses before year-end if they will pay less tax than you or your business. An individual can earn up to $10,822 in 2012 and pay no tax federally. So, your business can claim a deduction and there may be little or no tax owing by your family member.
This strategy will also provide income to your family member to create RRSP contribution room, allow for child care deductions, and make contributions to the Canada Pension Plan if the hope is to collect CPP later.
Pay tax-free amounts where possible
If you own a corporation, there may be ways to withdraw funds from your company on a tax-efficient basis. Consider taking a repayment of loans you might have made to the corporation, paying yourself tax-free capital dividends if your company has a balance in its “capital dividend account” (which is the case most commonly when the company has realized capital gains in the past), returning “paid-up capital” that you’ve invested in the company, or paying yourself rent if the company occupies space in your home (this income could be offset by common expenses, such as a portion of mortgage interest, property taxes, utilities, repairs, etc.).
Manage your shareholder loans carefully. If you’ve lent money to your company, consider whether it makes sense to charge interest on those loans. This may be the case where the company needs deductions to keep its taxable income below the small business threshold ($500,000 federally) in order to keep its tax rate down. And if you’ve borrowed money from your corporation, consider repaying those amounts to avoid paying personal tax on those loan amounts (in some cases it can make sense to borrow money to repay these loans; speak to a tax pro about other ideas).
Using holding company to protect your business assets
If you own assets, such as real estate or intellectual property, that you use in your business, consider separating that ownership from your business operations by placing those assets in a holding company to protect them from creditors of the business. Also, if you have excess cash in your corporation, consider paying those amounts as dividends to a holding company and then lending the funds back on a secured basis if needed in the business operations. This will give your holding company a claim on the assets of the business, protecting those assets from third parties.
Time the purchase and sale of capital assets
Finally, if you’re purchasing capital assets, consider doing so, and putting those assets to use, before your business year-end to begin claiming capital cost allowance (CCA) sooner. If you’re selling capital assets, consider delaying the sale until after your year-end to claim CCA for one additional year.
For more year-end tax planning strategy, please contact firstname.lastname@example.org, and let our Tax specialist and CPA to help you.
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Tax planning should be an important part of your efforts to get the most out of your financial resources. Though you only have to file your tax return once a year, it’s the tax planning steps you take throughout the year that will help you save money at tax time. AppXpert’s Tax Planning for You and Your Family can help you make tax planning a year-round activity.