Tax Saving Opportunities to Be Aware of This YearAs the 2013 year is coming to an end, individuals should be mindful of year-end tax planning opportunities that will need to be implemented prior to December 31st. The following are some popular tax planning items that individuals should be aware of this year.
Tax Considerations for Individuals
Tax Loss Selling
an individual owns investments with accrued losses, he or she may
consider selling these investments before the end of the year in order
to offset any capital gains realized in 2013. Any unused capital losses
realized can either be carried back three years or forward indefinitely
to offset capital gains in any of those years. In order to ensure that
trades are settled prior to the end of the year, all trades should take
place no later than December 24th, 2013. Please note that the
superficial loss rules will apply to deny capital losses on any
investments sold and repurchased within 30 days by either you or an
affiliated person (i.e. your spouse, a corporation controlled by you, or
a trust where you have a major beneficial interest, including an RRSP
or TFSA). If the superficial loss rules apply on the sale and the
capital loss is denied, it will be added to the adjusted cost base of
the investments for the person who purchased them.
Donating Public Securities with Gains
an individual owns publicly traded securities that have appreciated in
value, one strategy to consider is to donate the actual shares with
accrued gains instead of donating cash. There are two main tax
advantages derived from doing so. Firstly, the individual will receive a
charitable donation tax credit based on the fair market value of the
shares donated. In addition, there will be no capital gains tax payable
on the donated shares. Please note that all donations must be made prior
to December 31st in order to receive a tax receipt for 20131.
First-Time Donor’s Super Credit
part of the 2013 Federal Budget, a temporary first-time charitable
donor’s tax credit was introduced. First-time donors will be entitled to
a 40% federal tax credit on donations of $200 or less, and a 54%
federal tax credit on donations that are over $200, but limited to
$1,000. The credit will be applicable on donations made on or after
March 21, 2013 and can only be claimed once between 2013 and 2018. An
individual qualifies for this tax credit if neither the individual nor
their spouse has claimed the charitable donations tax credit or
first-time donor’s super tax credit in any taxation year after 2007.
may be required to pay income tax instalments if their tax liability is
more than $3,000 ($1,800 for Residents in QC) for the current year or
in either of the two preceding years (2012 or 2011). Individual
investors are often required to pay tax instalments since tax is not
deducted at source on investment income. Tax instalments are due
quarterly and the due date for final instalments is December 15, 2013.
Withdrawing From Your TFSA
planned withdrawal from your Tax-Free Savings Account (“TFSA”) should
be done prior to December 31, 2013 to ensure that the withdrawal creates
additional contribution room in 2014. If TFSA withdrawals are made in
2014, the contribution room will not be reinstated until the following
year. It is important to note that if you withdraw funds from your TFSA
and re-contribute in the same year, certain over contribution penalties
may apply if there is insufficient contribution room available.
31st is the last day for final RRSP contributions for individuals who
have turned 71 years of age during the 2013 year. Making a final
contribution can be beneficial for individuals who have unused RRSP
contribution room remaining as the amount of the contribution can be
deducted against income generated in 2013. Thus, this will reduce the
individual’s 2013 overall tax liability.
Opportunities for Self-Employed Individuals
individuals who carry on and operate an unincorporated business, some
additional tax planning opportunities may be available.
Paying a Salary to Family Members
paying a spouse or a child a reasonable salary based on their
involvement in your business. The salary should be a reasonable amount
considering the type of work performed and should be comparable to what a
third party would be paid to perform the same type of service. For
individuals who originally had little to no income, the salary paid will
be taxed at a lower marginal tax rate. In addition, the salary will be
considered earned income and will also generate future RRSP contribution room for each of those individuals.
Deferral of Income
those individuals who have a larger control over the timing and final
delivery of their services, one can consider delaying the final
completion of work and billing until after
December 31st. Any
income received after the year-end will be taxed in 2014 instead,
providing a one year deferral of the tax liability.
Purchasing Capital Assets
capital assets before the end of the year can provide your business
with a deduction for Capital Cost Allowance (CCA). As long as the
capital assets are available for use prior to December 31st, the
business can claim the CCA deduction in 2013. This idea is suitable in
situations where the individual was originally planning to purchase an
asset for their business in the near future.
Other Important Items
Income Splitting Loans
October 1st, 2013, the CRA increased its prescribed interest rate on
income splitting loans from 1% to 2%. Many individuals have finalized
income splitting loan arrangements prior to this date in order to take
advantage and lock into the 1% prescribed rate. One very important
reminder is that the interest payable on these types of income splitting
loans must be paid annually by January 30th of the following year
(within 30 days after year-end). This is a very important point as many
individuals forget to maintain the annual interest payments, which would
cause the income splitting plan to be ineffective. Even one late
payment can cause the attribution rules to apply for not only that year,
but also all subsequent years.