Now is a good time to talk to your client about tax planning again as the December 31 deadline approaches.
Listen to the entire podcast at AdvisorToGopowered by CIBC.
Top of mind for business owner customers this year are the tax changes for Canadian Controlled Private Corporations (CCPC), which include expanded tax on split income (TOSI) rules.
One of these changes concerns the distribution of income and the “limited ability to pay dividends from 2018 to family members who are not directly involved in the business,” says Jamie Golombek, managing director of tax and estate planning at CIBC Financial Planning and Advisory.
However, there are exceptions to the rule.
For example, family members who are shareholders and work in the company on average at least 20 hours a week are exempt from TOSI. Other exceptions depend on the ownership and age of the shareholder, Golombek says.
“For example, if a shareholder is over 24 years old and owns at least 10% of the voting power and share value, then the new TOSI rules do not apply,” he says, assuming the company meets certain conditions, such as not being a professional corporation.
Business owners have until December 31 to meet the 10% ownership requirement so that dividends paid in 2018 are not subject to TOSI. If a private company has other shareholders, such as a spouse, partner or adult children, clients should “wonder whether we will pay a dividend this year and whether the rules apply,” Golombek says.
He also suggests clients review the corporation’s share structure to determine whether a corporate reorganization is warranted. In this way, shareholders can hold different classes of shares for tax purposes. Clients may also want to change the share structure so that shareholders can qualify for a 10% ownership exception in terms of votes and value, he says.
Business owner customers are also impacted by new passive investment income rules for tax years after 2018, including a reduction in the small business deduction (SBD) for CCPCs earning passive investment income between $50,000 and $150,000 . SBD is reduced to zero on investment income of $150,000.
Golombek suggests clients plan for passive income now, as next year’s reduction to SBD is based on specific 2018 investment income (specifically, adjusted aggregate investment income).
One suggestion to reduce passive income by December 31 is to “make sure you’re taking out enough money to maximize your RRSP and TFSA,” Golombek says, adding that an income of about $147,000 at an interest rate of 18% results in maximum 2019 RRSP contribution of $26,500.
Another suggestion is to strategically realize investment gains and losses. “Consider a buy-and-hold strategy to defer capital gains if the corporation is approaching the $50,000 threshold in 2018,” Golombek says in report presenting their year-end tax tips.
Read: Passive Income Planning Tips
Not new, but noteworthy
Clients should also make sure they take advantage of routine tax planning opportunities, such as tax-loss sales, Golombek says. This involves selling investments with losses accrued at the end of the year to offset capital gains realized in other portfolio positions.
For the loss to be immediately available in 2018, settlement must occur in 2018. Since T+2 trading was introduced last year, December 27 is the last day to settle trades by December 31 to realize profits or losses, Golombek says. Net capital losses that cannot be used in the current year can be carried back three years or indefinitely to offset net capital gains in the remaining years.
For clients who hold U.S. or other foreign securities, currency exchange should be considered. “There have been big changes in the exchange rate over the years,” Golombek says. “When you do a currency conversion, make sure that what looks like a profit (isn’t) a loss.”
Another tip: Investors repurchasing a security sold at a loss should be aware of the superficial loss principle. This rule applies when an investor sells a security at a loss and buys it back within 30 days. In this case, “Your capital loss will be discarded and added to the adjusted cost basis (tax cost) of the repurchased security,” the report says. “This means that any benefit from capital loss will only be realized when the repurchased security is finally sold.”
More tips to share
Other tax options include paying certain expenses, such as investment-related expenses, by the end of the year. “Make sure they are paid into unregistered accounts by December 31 to get tax relief on investment advisory fees,” Golombek says.
Customers who turn 71 in 2018 have until December 31 to make final RRSP contributions before converting their RRSPs to RRIFs or registered annuities.
For seniors or those qualifying for the Disability Tax Credit (DTC), renovations to make your home accessible are eligible for the non-refundable Home Accessibility Tax Credit – worth up to $1,500 for work or goods paid for by December 31.
Additionally, help from the 2018 Registered Disability Savings Plan (RDSP) may still be available to customers if they act quickly, Golombek says.
“The government can contribute a maximum of $3,500 CDSG (Canadian Disability Savings Grant) and $1,000 CDSB (Canadian Disability Savings Bond) per year, depending on the net family income of the beneficiary,” Golombek states in the report. The subsidy and deposit are available until the year the program beneficiary turns 49, with the subsidy amount also based on program contributions. As a result, the report concludes that eligible investors – people eligible for the Disability Tax Credit, their parents and other eligible taxpayers – may want to make RDSP contributions before December 31.
Moreover, “entitlements to CDSG and CDSB are carried over for 10 years,” the report says. “For beneficiaries who have been eligible for DTC since 2008, some CDSG and CDSB eligibility may be lost after 2018.”
Customers with medical expenses can claim a tax deduction when expenses exceed the lower of 3% of net income or $2,302 in 2018. “If your medical expenses are less, there may be other expenses you can cover at the end of the year to qualify for this threshold,” says Golombek.*
Finally, to receive the gift tax deduction, charitable gifts must be made by December 31st.
“The best way to donate is through gifts of appreciated securities,” such as stocks, mutual funds and segregated funds, Golombek says. “If you donate it to charity, you’ll receive a receipt showing the fair market value and you won’t pay any tax on the accrued gain.”
As year-end customer discussions coincide with the charitable giving season, “why not remind customers that a great opportunity to give a charitable gift this year is to give a gift of securities?” – says Golombek. Depending on the province, this could save as much as 27% in capital gains tax on securities gains.
More tips can be found in the article full CIBC report.
This article is part of AdvisorToGo powered by CIBC. It was written without the involvement of a sponsor.
*An earlier version of this story included an example of prepaying medical expenses to meet the medical expense threshold. The CRA opinion did not allow for such elements and the example was removed to avoid confusion. Return to the updated sentence.
