Advice on... Preparing your 2018 Tax Checklist
Individuals
Consider selling investments with accrued losses.
If you have realized capital gains on some investments throughout the year, and you are holding additional securities with unrealized losses, consider selling those securities to trigger a loss which will offset the capital gain. Before moving forward with this strategy, you should ensure that:
• you review your portfolio with your investment advisor to determine which securities no longer meet your investment objective;
• the security sale can be "settled" by December 31st (December 27th is usually the last trading day for settlement by year end) ; and
• you will not be subject to the superficial loss rules which require that the same security cannot be purchased back by you, or a person affiliated with you, within 30 days of its sale.
In addition, any capital losses not used in the 2018 tax year to reduce capital gains can be carried back three years or forward indefinitely, to reduce capital gains in those years. Defer capital gains to the following year.
If your marginal tax rate will be lower in 2019, you may want to consider deferring the sale of capital assets with accrued gains to early 2019. The benefits of this strategy include:
• taxation of the gain at a lower tax rate;
• the tax payable associated with the gain will not be due for an additional year (April 30, 2020 instead of April 30, 2019); and
• businesses can claim an additional year of capital cost allowance (CCA) and can postpone any potential recapture until the next tax year.
Make a contribution to your RRSP.
You have until March 1, 2019 to make RRSP contributions that can be deducted on your 2018 tax return. However, making your contribution as soon as you are able maximizes the tax-free growth of your contribution. If you are turning 71 years old by December 31, 2018, you must collapse your RRSP by December 31st and a) withdraw the funds and pay tax on the proceeds, b) transfer the funds to a Registered Retirement Income Fund (RRIF) or c) purchase an annuity with the proceeds. If you have earned income in 2018 and will be transferring your RRSP funds to a RRIF, consider making an "over-contribution" before you convert your RRSP (and before December 31st) as the new contribution room created January 1st 2019 will absorb the 2018 over-contribution (net of a small 1% penalty). In addition, you may still be able to contribute to a spouse's RRSP under certain conditions. Manage your TFSA withdrawals and contributions.
Have you made your 2018 tax free savings account (TFSA) contribution? You can contribute up to $5,500 for 2018 and catch up on any unmade prior-year contributions from 2009-2017 as well. TFSAs are a great investment strategy as they allow you to earn interest, dividend and capital gain income on a tax-free basis. If you are considering making a TFSA withdrawal, try to make the withdrawal before December 31st. Then you can recontribute as early as January 1st 2019 with no penalty. Identify and/or increase year-end expenses that are deductible for tax purposes.
Certain expenses are deductible on your personal tax return including: professional dues, investment management fees, eligible teacher expenses, tuition, some legal costs , political contributions, childcare expenses, alimony, medical expenses, and donations. Increasing the amounts paid in 2018 (rather than in the following calendar year) will help reduce taxable income.
Businesses
Purchase capital assets before year-end.
If you have been planning to purchase assets for your business or rental, consider buying them before December 31st. This will allow you to claim a half-year of CCA even if the assets have only been put in service for a few days. Consider an Individual Pension Plan (IPP).
Are you at least forty years old and have significant T4 income from your corporation each year? An IPP may be an excellent method for planning for retirement. An IPP is a registered defined benefit plan that is established and paid for by your corporation. Usually, the primary shareholder is the only member of the plan but family members can also participate if they are employees of the company as well. Plan a holiday social event.
The 50% general limitation on meals and entertainment does not apply to employee social events as long as you don't exceed six events per year and each event is available to all employees. However, to ensure that the event does not become a taxable benefit to your employee, the cost cannot exceed $150 per person (excluding additional costs such as transportation). Plan salaries and bonuses for family members carefully.
Pay reasonable salaries to yourself and family members, who work in the business, before year-end in order to minimize the corporation's taxable income in 2018. This will also increase RRSP contribution room for each individual in the following year. To determine "reasonable" salaries, consider the market rate for each position - what would you pay an individual that was not related to you? In addition, you can declare a management bonus for yourself before your corporation's year-end. The amount will then be deductible from corporate income in the current year as long as it is paid to you no later than 180 days after the corporation's year-end. Repay shareholder loans before the end of the year.
If your business is incorporated, and you borrowed money from the corporation, ensure that the loan is repaid before the end of the corporation's following tax year. If not, you will need to report the amount loaned on your personal income tax return. Review your corporate investment strategy related to the new restrictions on the small business deduction.
The small business deduction (SBD) significantly reduces the tax rate for qualifying corporations and defers that tax payable on active business income to future periods. In 2018, restrictions to the small business deduction were announced that affect the taxability of investment income. Under the new rules, the small business limit will be reduced by $5 for every $1 of "adjusted aggregate investment income" (AAII) over $50,000, and will completely eliminate the SBD for corporations with AAII over $150,000 in the fiscal year. You may want to review strategies that will reduce the amount of AAII that the corporation reports without having to withdraw the investment funds (as amounts withdrawn would become taxable to you personally). Changing the balance of equity and fixed income investments may be helpful in reducing income as capital gains are taxed at a different rate. Investing in an exempt life insurance policy could also be considered as investment income earned within the policy is not included in the CRA definition of AAII.
Year long planning… Want to maximize the benefits of tax planning? Plan throughout the tax year, not just at tax time, and consult a tax professional well before the end of the year. This will put you and your business in a much better position at tax time!
Lil Rourke, CPA, CGA, HB Comm
Telephone: (705) 980-0180
Email: [email protected]
Website: www.lmrourkecpa.ca
This information has been carefully prepared but is provided with the understanding that the authors and
publishers have not been engaged in rendering legal, accounting, tax, or other professional advice and services. As
such, it should be seen as broad guidance only and should not be used as a substitute for consultation with
professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action,
please consult an LM Rourke, CPA professional in the context of your own particular circumstance.
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December 2018 issue
Year-end tax planning that can save you money! As the year-end is approaching, it's a good time to think about per-sonal and business income tax planning in order to yield the best tax savings possible. In this article, we have summarized some of the more common year-end tax strategies for both individuals and businesses.
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