Individuals

                                                                                       YEAR-END TAX PLANNING CHECKLIST

 

Employment income

 

Pay interest on employee loans before January 30

A low-interest loan from your employer is considered a taxable employment benefit at the Canada Revenue Agency’s (CRA’s) prescribed rate. Interest paid within 30 days of the end of the calendar year is reduced from the amount of the benefit. However, loan received as a sharehoder and is not repaid by the end of the following taxation year , the amount of the loan will be included in your income, even where interest is charged at the prescribed rate. 

 

Reimburse personal operating costs on employer-provided automobiles before February 14

Employer-provided automobiles used for personal use is a taxable benefit. The actual benefit is made up of two parts. The first part is a standby charge based on a percentage of the original cost or the monthly lease payments for the automobile. The second part applies if your employer pays the automobile’s operating expenses. In 2016, this benefit is equal to 26¢ per personal kilometre driven and applies unless all amounts paid for personal operating expenses are reimbursed to the employer by February 14, 2017.

 

The standby charge and the operating benefit are reduced by the amounts you pay to your employer. For a standby charge reduction, your payment must be made during 2016. For an operating benefit reduction, your payment must be made by February 14, 2017.

 

Business income

 

Pay reasonable salaries to family members before year-end

If your spouse or children work for you, consider paying them salaries. Salaries paid reduce your income and are taxed in their hands, possibly at lower marginal tax rates than if the income had been paid to you. They also provide family members with earned income for RRSP contributions.

 

Also, whenever you pay salaries to your spouse or children, ensure that withholdings for income tax, Canada/Québec Pension Plan (CPP/QPP), Employment Insurance (EI) (where an exemption is not available) and any applicable provincial payroll taxes are remitted as required. The salary and the amounts withheld for 2016 must be reported on T4 slips, which are due on or before February 28, 2017. Note that the equivalent form to the T4 in Québec is the RL-1 slip. RL-1 slips are generally due on or before February 28, 2017.

 

Ensure that the filing requirements for Partnership Information Returns are met

If you’re a member of a partnership, you may have a requirement to file a Partnership Information Return (Form T5013 including schedules and slips). Previously, the CRA’s administrative policy generally exempted partnerships with fewer than six partners from filing a return. However, the CRA has changed their filing requirements for partnerships with fiscal periods ending on or after January 1, 2011. As a result of these changes, you will have to assess on an annual basis whether your partnership has met any of the filing criteria for the year. These criteria are based on size of the partnership, except that tiered partnerships, partnerships with a trust or corporation as a partner and certain resource partnerships will not be exempt based on size. As the filing criteria are based on current year results and not the prior year, you may find that at the end of the year you have a filing requirement that you weren’t expecting. 

 

International Tax

 

Plan ahead for the thin capitalization rules

The “thin capitalization rules” exist to prevent certain foreign-owned corporations resident in Canada from using an excessive amount of debt to finance their Canadian operations. In general, these rules limit the debt-to-equity ratio for Canadian subsidiaries of non-residents to 1.5-to-1 (reduced from 2-to-1 for corporate taxation years that begin after 2012). Interest expense on debt that exceeds this ratio will not be deductible for Canadian tax purposes.

 

The thin capitalization rules were extended to also apply to debts of partnerships of which a Canadian-resident corporation is a member effective for debts outstanding during corporate taxation years that begin on or after March 29, 2012.

 

Changes arising from the 2013 federal budget further extended the thin capitalization rules to apply to Canadian-resident trusts and non-resident corporations and trusts that operate in Canada, as well as to apply where a Canadian-resident trust or a non-resident corporation or trust is a member of a partnership. These measures became effective for taxation years beginning after 2013, to both new and existing borrowings.

 

If your corporation, trust or partnership is subject to these changes, it will be important to review your capital structure to ensure that the trust, corporation or partnership will not have an excess interest deduction that will be disallowed. Canada’s tax rules with respect to foreign investment are very complex. 

 

Owner-manager considerations

 

Pay dividends from your corporation

In certain situations, a corporation can be used to split income with family members. For instance, if your spouse or children, who are 18 years of age and older, subscribe for shares of your corporation at fair market value using their own funds, they can receive dividends from the corporation out of its after-tax profits and you can split income. Dividends paid by the corporation before its year­end could generate a tax refund on its corporate tax return, if it has previously earned investment income on which it paid tax. If your corporation has a year-end early in 2017, say January 31, you could declare a dividend in January, which would generate a tax refund for the corporation on its current return. The recipients of the dividend would then be taxable on their 2017 personal T1 returns which are due April 30, 2018. Note that for Québec filing purposes, the 2017 personal TP1 returns will generally be due April 30, 2018 as well.

 

There could be other problems with this type of planning, including if you’ve loaned or transferred property to the corporation. In this case, you must ensure that the company maintains its status as a Small Business Corporation (SBC). Otherwise, you could be subject to an imputed interest penalty if your spouse is a shareholder.

 

Consider also that income splitting with minor children is more difficult because of the income splitting tax, or “kiddie tax”. Under these rules, minor children are taxed at top personal rates on dividends received from your corporation and certain types of business income. As well, certain capital gains will be treated as dividends and taxed at the top rate. The 2014 federal budget extended the application of kiddie tax to certain types of business and rental income from third parties, allocated to a minor from a trust or partnership where a person related to the minor is engaged in the activities of the partnership or trust to earn that income. These changes became effective for 2014 and subsequent taxations years. 

 

You should review your corporation’s status throughout the year, and again at year-end in conjunction with tax planning for you and your family. If dividends are required, they should be properly documented and recorded in the company’s minute book. Also, for any dividends paid in 2016, the corporation must prepare and file T5 slips to report the dividends on or before February 28, 2017. Note that the equivalent slips in Québec are the RL-3 slips, which are generally due on or before February 28, 2017.

 

If your corporation had business income after 2000 in excess of the federal small business limit or received public company dividends after 2005, the corporation may be able to pay an eligible dividend. These dividends are subject to a lower tax rate and must be designated as eligible. As these rules are fairly complex and strict documentation rules apply, you should consult with your BDO advisor before declaring dividends to take advantage of the eligible dividend rules.

 

Establish your salary/dividend mix from the corporation

If you draw funds from your corporation throughout the year for personal expenses, you should determine whether these amounts will be characterized as salary or dividends before year-end. Otherwise, the funds withdrawn could be treated as a shareholder loan, unless certain conditions are met. A shareholder loan would be included in your income without the benefit of the dividend tax credit, and without being deductible to the corporation as salary. Also, it would not be considered earned income to you for RRSP purposes.

 

In general terms, if your company earns active income that is less than the federal small business limit of $500,000, it’s usually better to declare dividends, the payment of which can offset the shareholder loan. For federal tax purposes (and for certain provinces and territories), active business income up to $500,000 will be taxed at the small business tax rate. Manitoba and Nova Scotia are two exceptions where the limit differs. Manitoba’s small business limit is $450,000 while Nova Scotia’s limit is $350,000.

 

In the past, where active income exceeded the small business limit, the general rule of thumb was to have the corporation pay you a salary or bonus to reduce its income to the small business limit as the total corporate and personal tax associated with retaining excess income and paying it out as a dividend to you exceeded the tax cost of a bonus (referred to as a “tax integration cost”). At the same time, not paying a bonus resulted in a tax deferral, as general corporate income tax rates on income retained by the corporation are lower than the top personal tax rate. Despite the deferral, paying a bonus was often the rule of thumb as the integration cost was just too high.

 

However, the corporate tax system was substantially changed in 2006, with the introduction of the eligible dividend rules. At the same time, the federal government and some provincial governments started a gradual process of lowering general corporate tax rates. Soon, it became clear that as the general tax rate changes were phased in, the tax cost of keeping “high-taxed” general corporate income in Canadian-controlled Private Corporations (CCPCs) was going to decline dramatically, particularly in those provinces which also undertook to reduce provincial corporate tax rates. So, abiding by the longstanding rule of thumb of paying a bonus may no longer be the most effective approach.

 

For income eligible for the small business deduction, integration is effective in most provinces. So, this income can generally be retained in the corporation without concerns related to a future integration cost. The same cannot be said for investment income subject to refundable tax and business income subject to tax at the general rate as there are material integration costs in some provinces. Therefore, specific advice will be needed.

 

Of course, there are other considerations to make in the salary versus dividend decision. Drawing dividends alone will not provide you with earned income for RRSP purposes. Also, if you have no sources of earned income and your spouse works and earns more than you, neither one of you will be eligible to claim child care expenses. Child care expense deductions are generally limited to 2/3rds of the earned income of the lower income spouse. Therefore, you should consider paying yourself enough salary to allow a maximum RRSP contribution and a claim for child care expenses.

 

Another important consideration is whether your corporation is engaged in scientific research and experimental development, as the most beneficial tax rules are phased out where a corporation’s (or associated group’s) taxable income for the prior year exceeds the federal small business limit. Finally, where a corporation begins to retain high-rate income, its tax instalment base will increase at the same time additional income tax for the prior year becomes payable, which could create a short-term cash flow issue.

 

Consider paying interest on shareholder loans

If you’ve paid yourself sufficient salary to maximize your RRSP and your family’s child care deduction claim and your corporation still has more than $500,000 of active business income, and you have decided that it is preferable to pay taxable income other than dividends to yourself, you could consider charging interest on any loans you’ve made to the company. The interest would be deductible to the corporation and would not be subject to provincial payroll taxes (the decision on whether to pay interest or an eligible dividend would be similar to the decision above for bonuses).

 

To be deductible to the corporation, the interest must be charged at a reasonable rate. Also, there must be a legal obligation to pay interest established in advance. Therefore, if you intend to charge interest on your loans to the corporation, you should establish the terms at the beginning of the year. It should be noted that where a minor child or a trust for a minor child makes a loan in support of a business carried on by a relative, the interest will be subject to the income splitting tax (or kiddie tax).

 

Consider planning to reduce your corporation’s taxable capital before year-end

An additional consideration for CCPCs is monitoring taxable capital. CCPCs with taxable capital for federal tax purposes in excess of certain limits (on an associated group basis) will begin to lose access to the small business deduction and the enhanced 35% investment tax credit for scientific research and experimental development. Taxable capital includes share capital and debt and usually requires some tax-based adjustments. As well, the calculation provides for an allowance which reduces taxable capital for certain specified investments.

 

Taxable capital for the prior year is generally used in determining how much of these benefits are lost. Access to the small business deduction is eliminated when taxable capital reaches $15 million and access to the enhanced 35% investment tax credit is eliminated when taxable capital reaches $50 million. The “clawback” of these benefits represents a good reason as to why capital tax planning should become an important part of your year-end tax review. At one time, most provinces levied a tax on capital. However, all jurisdictions have generally eliminated capital tax on non-financial institutions (with Nova Scotia being the last province to eliminate its general capital tax, effective July 1, 2012).

 

There are a number of very simple steps that can be taken prior to year-end to reduce taxable capital. For instance, using excess cash to pay off some debts may reduce your taxable capital. Consult your BDO tax advisor for further information on planning points that may be applicable to your situation.

 

Complete sale or transactions involving corporate ECP by December 31, 2016

On January 1, 2017, new rules are set to take effect that will result in higher income taxes payable by private companies when a business or eligible capital property (ECP) assets are sold at a gain. ECP assets generally include goodwill and other intangibles without a fixed lifespan which have been purchased for the purpose of earning income from a business. Other intangible assets that are treated as ECP for tax purposes may include: incorporation costs, customer lists, farm quotas, and franchise rights and licences with an indefinite life.

 

Under the current regime, ECP receives tax treatment that is separate from other capital assets that are otherwise subject to the CCA rules. In simple terms, the new rules will end the current tax treatment of ECP and instead will include ECP expenditures in the existing CCA rule structure.

 

The changes to the ECP rules are complex and have various implications for businesses with intangible assets. As mentioned above, one such consequence of the new rules is higher taxes being paid on capital gains arising from the disposition of ECP property on or after January 1, 2017. Consider that under the current rules, 50% of the gain on the sale of ECP of a CCPC is taxed as active business income at the current federal rate of 15% (or 10.5% if it is eligible for the small business tax rate). In contrast and as a consequence of the new rules, after 2016 any resulting gain will become subject to tax at the federal investment tax rate (which in 2016 is 38.67%). This is a significant change.

 

Consequently, if you are currently considering, or are in negotiations for, the sale of the assets of your business, and ECP (such as goodwill, trademarks, or farm quotas) make up a substantial part of the value of your CCPC’s assets.

 

Purchase older automobiles from your corporation

If you use an older corporate-owned automobile for personal use, you may want to purchase it at fair market value. The standby charge benefit included in your income is based on the original cost of the automobile, no matter how old it is. Buying the older automobile now will ensure that you won’t be taxed on a large automobile benefit next year. 

 

Investment income

 

Review the mix of investments in your portfolio

Each type of investment income is taxed differently. Most interest must be accrued annually and is fully taxed. Dividends are only taxed as received and are eligible for a dividend tax credit. Capital gains are taxed when realized and, with a capital gains inclusion rate of 50%, are generally taxed at a lower rate than dividends. Note, however, that the capital gain vs. dividend comparison changed significantly in 2006 as the changes in the taxation of dividends significantly lowered the tax rate that applies on eligible dividends. Although the tax rate on capital gains is higher than the tax rate on eligible dividends in most jurisdictions, the spread between these two rates is in most cases much smaller than the spread between the capital gains rate and the rate on ineligible dividends.

 

In general, most dividends paid by a Canadian public company after 2005 will be eligible dividends. These dividends are subject to a 38% gross-up (which is higher than the gross-up that applies for ineligible dividends) and are eligible for a higher dividend tax credit (approximately 15% of the taxable amount federally). Most provinces have also introduced a higher tax credit on eligible dividends.

 

Year-end is an excellent time to review the mix of investments in your portfolio to ensure that you’re getting the best returns on an after-tax basis.

 

Consider the timing of the taxation of interest earning investments

Interest on investments purchased after 1990 must be accrued annually on the anniversary date of the investment, unless you receive the interest more frequently. For instance, interest on Canada Savings Bonds (CSBs) purchased on November 1, 2015, must be accrued as at October 31, 2016 and included in 2016 income. This applies even if you have not yet received the interest, such as with compound interest CSBs.

 

Also, some investment products pay interest at increasing rates over the term of the investment. For tax purposes, you may find that you must report the interest at an “average rate,” with higher income recognized in the earlier years, when the actual interest received is lower.

 

Be sure to take into consideration the timing of the receipt of income and the tax consequences when investing. Also, if you’re thinking of purchasing a one year Guaranteed Investment Certificate towards the end of 2016, you may want to consider delaying the purchase to early 2017 to defer the recognition of the income to 2018.

 

Review your outstanding debt to ensure that you make your interest expense deductible to the maximum extent possible

To be deductible, interest expense must relate to debt incurred to earn business or investment income. Interest on personal debts, such as mortgages or car loans and interest incurred to make RRSP contributions, are not generally deductible. Another point to keep in mind is that investment income doesn’t include capital gains. The CRA takes the position that interest on funds borrowed to invest in assets producing only capital gains isn’t deductible.

 

Review your loans outstanding at year-end and your overall cash position. Where possible, pay off non-deductible debt as quickly as possible. Avoid using excess funds to pay off business or investment loans, if you know you will have to make large personal expenditures in the near future. Where you have a choice, always borrow for investment or business purposes over personal uses.

 

Also, note that where you’ve sold an investment at a loss and continue to carry debt incurred to purchase the investment, you should leave these loans outstanding as long as you have other non-deductible debt that could be paid off first. Interest from debts relating to the loss on an investment (other than real estate or depreciable property) continues to be deductible as long as those debts remain outstanding and all of the proceeds from the loss asset are reinvested.

 

Consider delaying mutual fund purchases

If you’re considering purchasing units of a mutual fund, you may want to defer the purchase until early 2017 (or later in December 2016). Many mutual funds (and most equity funds) distribute income and capital gains once a year, during December. Consequently, if you purchase units of these funds just prior to a distribution, you will be allocated a full share of the mutual fund’s income and gains for that year. Deferring the purchase until after the mutual fund distribution will ensure that you won’t be allocated taxable income for 2016.

 

Consider using your Tax-Free Savings Account

Since January 1, 2009, you have been able to incorporate the use of a Tax-Free Savings Account (TFSA) into your mix of investments. TFSAs allow you to save for many purposes, including shorter term savings goals such as buying a home or new car and longer term savings goals such as saving for retirement.

 

Canadian residents 18 years of age or older can open up a TFSA and contribute amounts to the TFSA up to the contribution room available. You will acquire a $5,000 contribution room every year, which will be indexed to inflation and rounded to the nearest $500 on an annual basis. The dollar limit increased to $5,500 due to this indexing, and applies for 2013 and 2014.

 

Arising from proposals made in the 2015 federal budget, the TFSA dollar limit was increased to $10,000, effective for 2015 and subsequent taxation years. However, the federal government reversed this increase in 2016 and returned the dollar limit to its previous level of $5,500. Note, however, that the 2015 limit will remain at $10,000.

 

Any withdrawals made in the previous year as well as any unused contribution room from the previous year will be added to the contribution room for the current year. A TFSA is generally permitted to hold similar investments to those of an RRSP, including mutual funds, publicly traded securities, GICs, bonds and certain shares of small business corporations. However, there are specific rules that will limit investments that are not available on the open market. In particular, the rules on private company investments are quite restrictive. You will be subject to penalties on any investments which are not permitted to be held in your TFSA.

 

In 2010, a number of TFSA contributors were identified by the CRA as having made possible excess contributions to their TFSA. For many, this was because they had either used their TFSA as a savings account (moving funds in and out of the account repeatedly) or had moved amounts between plans without a direct transfer. In order to avoid making excess contributions to your TFSA and subjecting the excess balance to a penalty by the CRA, you should consider your timing when replacing TFSA funds withdrawn and ensure that direct transfers between your TFSAs are reported properly by your financial institution(s). It is worth noting that TFSA overcontributions will be subject to a penalty tax for excess contributions, calculated at 1% per month on the highest amount of excess TFSA contributions in that month.

 

While contributions to a TFSA will not be tax deductible, income, losses and gains in respect of investments held within a TFSA, as well as amounts contributed, will not be included in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits.

 

Generally, if you make an interest-free loan or gift funds to a spouse to invest, the income on the investment will be attributed to you and taxed in your hands. In the case of funds used by your spouse to make a TFSA contribution, there will be no taxable income, and therefore, the attribution rules will not be a concern. The same will be true where you make an interest-free loan or a gift to an adult child so that they can invest in a TFSA. Loaning or gifting money to family members to contribute to a TFSA will be an important personal tax planning consideration.

 

 

Capital gains and losses

Only 50% of capital gains and losses realized are recognized in calculating taxable income. Capital losses can generally only be deducted to the extent you have realized capital gains in the year. Capital losses may also be carried back three years or forward indefinitely to offset taxable capital gains that have been realized in other years (to the extent that your 2016 capital losses exceed capital gains).

 

Review your asset sales for the year to determine your net capital gain/loss position, and consider the following planning points:

 

Utilize your capital gains exemption for qualified small business corporation shares and qualified farm/fishing property

A capital gains exemption is available for capital gains from the disposition of qualified small business shares, qualified farm property and qualified fishing assets. This exemption increased from $813,600 in 2015 to $842,176 for 2016, as a result of indexing. In addition, new rules arising from the 2015 federal budget have increased this exemption to $1 million for dispositions of qualified farm or fishing properties on or after April 21, 2015. If you own such assets with accrued gains, you can trigger the gain by means of an actual sale to a third party, or by transferring the asset to your spouse (if you elect to transact at fair market value) or to a corporation you control. Before doing so, you should consult with your BDO advisor to ensure that any gain will qualify for the exemption.

 

Note that the exemption amount has increased in recent years. If you previously triggered a gain to take advantage of a lower exemption amount, it may make sense to enter into a similar arrangement to use up the additional exemption amount that has since become available. Consult with your BDO advisor to determine how and when it may make sense for you to utilize any additional exemption amount that you may be entitled to.

 

Defer capital gains where proceeds reinvested in a small business corporation

If you own shares of an eligible small business corporation and dispose of the shares, recognition of the capital gain may be deferred if you reinvest the proceeds from the sale of those shares in another eligible small business corporation. There are several conditions that must be met to be eligible to defer the capital gain. You should consult with your BDO advisor to determine if you are eligible for the deferral.

 

Consider selling investments with accrued losses before the end of the year

If you’ve realized capital gains in the year, consider selling assets with an accrued loss to offset the gains. You may also want to realize the loss if you’ve had capital gains in the last three years that weren’t offset by your capital gains exemption. In order for a disposition of marketable securities in an open market to be included in your 2016 tax year, you’ll have to sell them on or before the stock exchanges’ last trading day for settlement in 2016. For Canadian exchanges, December 23 would generally be the last trading date if you want to have the transaction settled in 2016.

 

Note that rules (known as the stop-loss rules) apply to deny losses on certain dispositions of property, such as:

  • Where you transfer an asset to your spouse or a corporation controlled by you and/or your spouse; or
  • Where you sell an asset on the open market, and you, your spouse or a corporation controlled by you or your spouse reacquires it within 30 days of its disposition.

 

Note that these stop-loss rules will also apply where you sell or contribute an asset to your or your spouse’s RRSP or TFSA at a loss or where you sell an asset at a loss and that asset is repurchased in an RRSP or TFSA belonging to you or your spouse within 30 days.

 

Saving for retirement

 

Make a contribution to your RRSP for 2016

Your contribution limit for 2016 is 18% of your 2015 earned income (to a maximum of $25,370) less the value of any benefits that accrued to you in 2015 as a member of a Registered Pension Plan or a

 

Deferred Profit Sharing Plan (your Pension Adjustment — PA). Your PA was reported by your employer on your 2015 T4 slip. Also, your 2015 Notice of Assessment should include the CRA’s calculation of your 2016 contribution limit, with any unused amounts carried forward from previous years. This information is also available on the CRA’s “My Account” service. Your RRSP contribution must be made on or before March 1, 2017 to be deductible for 2016. If you don’t have the necessary funds, consider borrowing to make the contribution. Although interest on an RRSP loan is not deductible, borrowing may still make sense if you can repay the loan quickly. If you receive a tax refund, you can apply it to the loan to reduce the balance outstanding.

 

If you decide not to contribute for 2016, your ability to do so carries forward indefinitely. However, even if you don’t need the deduction for 2016, you should still consider making the contribution if you have excess funds which would otherwise earn taxable income in your hands. You can claim the deduction in any future year. The income from the funds will accumulate tax-free in your RRSP.

 

If you have excess investment funds, make your RRSP contribution for next year as soon after December 31 as possible, to maximize the tax deferral of income earned in the plan. For 2017, the RRSP limit is the lesser of 18% of your 2016 earned income (less your 2016 PA) or $26,010.

 

You can also make a one-time overcontribution to your RRSP. Penalties do not apply if the amount is $2,000 or less and, as noted above, income from the funds will accumulate tax-free in your RRSP. You should keep in mind that the CRA does track RRSP overcontributions, and penalties apply on most overcontributions in excess of $2,000.

 

Withdraw RRSP funds in low income years

If your income is abnormally low, consider withdrawing funds from your RRSP before the end of the year. This alternative would generally only appeal to someone in the lowest tax bracket who would otherwise waste available deductions and credits. Keep in mind that once RRSP funds are withdrawn, the amounts can only be recontributed to the extent you have RRSP contribution room available in the future. Also, income earned on the funds withdrawn will no longer benefit from tax-free accumulation in the RRSP.

 

When you withdraw funds from your RRSP, you’ll receive a T4RSP slip showing the amount of the withdrawal and the tax withheld. When you file your tax return, include the amount in income, calculate the final tax and claim the withholdings as a tax payment.

 

Ensure that your 2016 earned income allows the maximum 2017 RRSP contribution

Your right to make an RRSP contribution for one year depends on your earned income for the previous year. For 2017, your contribution will be limited to 18% of your 2016 earned income, to a maximum of $26,010. Therefore, you need at least $144,500 of earned income in 2016 to maximize your 2017 contribution. This limit is further reduced by your PA for 2016.

 

In general terms, earned income is income you receive from employment, business or the rental of real property, as well as any alimony and taxable maintenance. It is reduced by business or rental losses and any alimony and maintenance payments made. If you have some control over your income level make sure that you have factored in the ability to make RRSP contributions into your decision of whether to earn a salary rather than dividends.

 

Sell non-qualified assets in your RRSP before December 31

There are specific rules as to the types of assets your RRSP can hold. If you have a self-directed RRSP, you may have purchased assets which don’t qualify, referred to as non-qualifying investments. For such assets acquired after March 22, 2011, a tax equal to 50% of the amount of such investment will apply to the RRSP annuitant. Where the non-qualifying investment is disposed of, the tax will be refunded if certain conditions are met. If the purchase and sale are in the same year, the tax and the refund will generally be offset. For these acquisitions, it will be beneficial to dispose of the non-qualifying assets before December 31, 2016.

 

Review your RRSP for prohibited investments

In 2011, significant legislative changes introduced the concept of a prohibited investment for RRSP purposes, to make such rules more consistent with the rules for TFSAs. Under these rules, if you and non-arm’s length parties together hold an interest of 10% or more in a particular investment, it may be a prohibited investment, despite the fact that the investment may otherwise qualify. This rule will be of particular importance for investments in privately held companies within RRSPs. Although investments held on March 23, 2011 will generally not be subject to a penalty tax, income on these investments may now be taxable.

 

Purchase an annuity or RRIF to claim the pension income credit

If you’re 65 or over, you’re entitled to claim a federal tax credit on your first $2,000 of pension income. The credit is equal to the tax that would be paid on the income at the lowest tax bracket. If you don’t currently receive pension income and are in the lowest tax bracket (income less than $45,282 for 2016 federal tax purposes; threshold varies by province/territory), consider transferring funds to a Registered Retirement Income Fund (RRIF) and withdraw $2,000 per year. If you’re in the low tax bracket, the income will effectively be received tax-free federally. Note, however, that some of the pension income will be taxed in most provinces, where the pension credit amounts are less than $2,000. If you’re in a higher bracket, there will be a tax cost, depending on your marginal tax rate. This strategy will also work if you use a portion of your RRSP funds to purchase an annuity which pays at least $2,000 per year.

 

If you’re between the ages of 71 and 94, and have a RRIF, new rules arising from the 2015 federal budget have reduced the minimum withdrawal percentage for 2015 and subsequent taxation years. The reduced percentage will allow you to preserve more of your RRIF savings in order to provide income at older ages, while continuing to ensure that the tax deferral provided on RRSP/RRIF savings serves a retirement income purpose. 

 

Review pension income splitting with spouse

If you or your spouse earns pension income eligible for the pension tax credit, an election can be made to transfer up to one-half of the eligible pension income to the other spouse. This is a joint election that can be taken advantage of when filing your and your spouse’s tax returns. The amount transferred reduces the transferor spouse’s net income, and increases the transferee spouse’s net income so a tax saving should generally arise where the transferee spouse has a lower marginal tax rate. However, one should keep in mind that there can be negative effects that arise from increasing a lower-income spouse’s net income. For example, some tax credit amounts (particularly the age credit) and the OAS clawback are based on net income. With this in mind, in certain cases it may be beneficial to elect to transfer from the lower-income spouse to the higher-income spouse.

 

Another possibility to consider if you or your spouse is age 65 or over is whether additional amounts should be withdrawn from your RRIF with a view to splitting some of the additional amount. This could allow you to take further advantage of a spouse’s low tax rates, or a spouse’s losses carried forward (other than capital losses). However, you can only split up to 50% of the additional amount received, so some of the extra RRIF withdrawals will be taxed in your hands — this cost would have to be compared with the tax benefit from splitting more income.

 

Delay RRSP Home Buyers’ Plan (HBP) withdrawals until after year-end

If you qualify, you and your spouse can withdraw a specific amount tax-free from your RRSP towards the purchase of a principal residence. The limit for HBP withdrawals is $25,000. The home must be purchased by October 1 of the year following the year of withdrawal. Amounts withdrawn must be repaid to RRSPs in 15 equal instalments, starting with the second taxation year following the year of withdrawal (amounts not repaid are taxed as an RRSP withdrawal).

 

If you’re planning on using the HBP towards year­end, consider deferring your withdrawal until after December 31. This will extend your time period for purchasing your home and repaying the amounts withdrawn by one year. You’ll also want to delay your HBP withdrawal if you won’t have received the full amount by January 2017. Under the HBP rules, multiple withdrawals are possible, but all withdrawals must be received in the same calendar year or in January of the following year. Consequently, if you want to withdraw funds after January 2017, you shouldn’t make an HBP withdrawal in 2016.

 

Remember to make your required Home Buyers’ Plan repayment by March 1, 2017

If you participated in the HBP prior to 2015, you have a repayment due in the 2016 taxation year. A repayment made on or before March 1, 2017 will be considered to have been made in the 2016 taxation year. A repayment is made by making a regular contribution to your RRSP (or Pooled Registered Pension Plan (PRPP)). When you file your 2016 tax return, you’ll have to complete Schedule 7. On this form, you’ll designate that the RRSP or PRPP contribution is to be applied as an HBP repayment and is not a deductible contribution.

 

If you have already made RRSP (or PRPP) contributions during 2016, you can designate an amount to cover your required repayment. The CRA sends an HBP Statement of Account each year with your Notice of Assessment or Reassessment.

 

Remember to collapse your RRSP if you will turn 71 this year

You can’t have an RRSP past December 31, 2016 if you’re 71 or older at year-end. So, prior to December 31, 2016, you must collapse your RRSP and pay tax on the fair market value of the plan’s assets at that time, purchase an annuity or transfer your RRSP assets to a RRIF. No tax is paid at the time of the purchase of an annuity or at the time of a conversion to a RRIF.

 

If you will generate RRSP contribution room for 2017 because you have earned income in 2016, but you have to collapse your RRSP before the end of 2016, consider making an overcontribution to your RRSP in December, immediately before collapsing it. The amount of the overcontribution should equal $2,000 plus the 2017 contribution limit. A 1% penalty tax on the overcontribution in excess of $2,000 will apply for December 2016 — however, this will end on January 1, 2017 when the new contribution room becomes effective. The basic $2,000 overcontribution will become deductible when you generate additional RRSP room in the future and will never attract the 1% overcontribution penalty tax. If you won’t have earned income after 2016, then you may not want to make an overcontribution. Ask your BDO advisor if this type of planning makes sense for you.

 

If you must collapse your RRSP this year, you can still contribute to your spouse’s RRSP if you have contribution room and your spouse has not reached age 71 by December 31, 2016. This is an excellent way to build up your spouse’s RRSP.

 

Consider whether an Individual Pension Plan is right for you

In addition to RRSPs, another retirement savings option is available to owners of incorporated businesses, including professionals who have incorporated. Under the rules for defined benefit pension plans, it is possible to set up an individual pension plan (IPP) for business owners. However, there have been recent legislative amendments that may change the benefit that an IPP has over other plans and this has left many experts wondering whether IPPs are still an advantageous way of saving for retirement. Talk to your BDO advisor to see if IPPs may make sense for you.

 

Deductions and credits

 

Pay amounts eligible for deduction or credit prior to December 31

Many items which are creditable or deductible for tax purposes must be paid by the end of the year. These amounts include alimony and maintenance, child care expenses, investment counsel fees, professional dues, charitable donations, medical expenses and political contributions.

 

Donations of shares

Gifts of certain publicly-traded securities are not subject to capital gains tax. Where certain conditions are met, employees who donate certain securities acquired through a stock option plan to a qualifying charity may deduct a portion of their taxable stock option benefit. Specifically, when combined with the regular stock option deduction of 50%, none of the stock option benefit will be taxed when shares are gifted. An employee may also be allowed to deduct a portion of their stock option benefit if the proceeds from the disposition of the securities acquired through the stock option plan are donated.

 

The capital gains tax exemption also extends to capital gains realized on the exchange of certain unlisted securities for publicly-traded securities, when the publicly-traded securities are the only consideration received on the exchange and are then donated within 30 days of the exchange.

 

Pay for medical expenses and charitable donations in one year

There is usually an added benefit if payments for charitable donations for two years are grouped into one year. This is due to the fact that the first $200 of donations is eligible for a 15% federal non­refundable credit in 2016 while the excess over $200 is eligible for a 29% (or possibly 33% for certain taxpayers with income over $200,000) credit.

 

You’ll receive a slightly larger credit if you group two years of donations in one year.

 

As well, recent legislation has introduced an enhancement to the existing charitable donation tax credit for donations made by a first-time donor. An individual would be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed either of the charitable donation tax credit or the first-time donor credit in any year after 2007. A first-time donor would be entitled to an additional 25% credit for up to $1,000 of monetary donations made on or after March 21, 2013. The super credit may be claimed