As 2019 comes to a close, a review of your personal and corporate finances may allow you to take advantage of tax-saving opportunities that may be available. With the Liberal government elected to a minority government this year, supported by the NDP and Green Party, further tax changes are anticipated in the near future. A significant tax change could include Increasing the capital gains inclusion rate. While tax planning should be a year-round process, here are some common year-end tax planning strategies you may be able to take advantage of to maximize your tax savings. Professional tax advice is vital to the proper implementation of some of these strategies. If you have any questions about these or any other tax planning strategies, please contact your Bateman MacKay LLP account manager for more information.
For Business Owners
There are different benefits to consider when deciding between receiving a salary or dividends.
- A salary of $151,278 will provide the maximum in RRSP room for 2020.
- If your company’s taxable income exceeds $500,000 in 2019, salaries can reduce your corporate tax liability.
- Do not require tax withholdings or CPP and EI contributions.
- If your only source of income is ineligible dividends, paid out of corporate earnings taxed at the small business rate, you can receive up to $50,000 in 2019 and pay an average tax bill of 9.7%.
Tax on Split Income (TOSI)
One of the most significant and complex changes to the Canadian Income Tax Act in recent years is the tax on split income. The changes require a family member to be actively engaged in the company to split income. Income splitting has become exceedingly complex and if you are considering this strategy, tailored professional tax advice is crucial.
Capital Asset Purchases/Sales
Consider purchasing capital assets and putting them to use before your business year-end. Such an investment enables a capital cost allowance claim. If you have plans to sell capital assets, delaying until after your year-end will allow you to claim the capital cost allowance for an additional year.
Individual Pension Plan
If you own a business that is incorporated, you can consider forming an Individual Pension Plan (IPP). An IPP is a defined benefit registered pension plan; it is sponsored by your company and designed for you as the only member. Generally, IPPs have only one plan member, but certain family members may also participate if they are employees of the company. This plan enables both year-end corporate income tax deductions combined with structured retirement planning.
Salaries and Bonuses to Family Members
If you own a business and your spouse or children work for you, and they have low income in 2018, consider paying those family members salaries or bonuses before year-end. These payments must be reasonable and commensurate with the services they performed, and they must be paid within 180 days of your business’ year-end for the amounts to be deductible in the current fiscal year. If the person receiving a bonus has not reached the maximum RRSP contribution for 2019, it may create additional room to contribute to their RRSP in 2019.
Succession planning is a critical component of protecting and preserving the value of your enterprise. A strong, tax-efficient plan requires a well-designed, customized and multi-disciplinary approach. If your plan includes family members inheriting your business, consult your Bateman MacKay LLP account manager to ensure your plan will not be impacted by various tax changes. If your plan has not been updated in over 5 years, it may not be as tax-efficient as possible and a review should take place.
Home Office Deduction
If your home office qualifies, you can deduct business-use-of-home or workspace-in-the-home expenses from your income. If you are self-employed, the home office must be the principal place of your business, or you must use the space exclusively for business purposes on a consistent basis. If you are an employee, your home office must be exclusively for work, or you must use that space to complete more than 50% of your work. Determine the percentage of your office relative to your home’s total size, and this percentage of home expenses may be deducted as home office expenses on your tax return. These expenses can include mortgage interest, property tax and utilities.
A charitable donation must be made on or before December 31, 2019 to a qualified charity to be eligible for a 2019 tax credit. In Ontario, 20.5% of the first $200 donated plus 40.16% of any amount above $200 is eligible for a tax credit.
You have until March 1, 2020 to contribute to your RRSP or a spousal RRSP to be able to deduct the amount on your 2019 return. If you have contribution room, (18% of earned income up to a maximum of $26,500) contributing before December 31, 2019, helps to maximize the tax-deferred growth in your plan.
If you expect to be in a lower tax bracket next year and receive a year-end bonus, consider deferring the receipt of your bonus to early 2020. You may also request the bonus, or a portion of the bonus, to be transferred directly into your RRSP to prevent the withholding of taxes, if you have enough unused RRSP deduction room in the year of the transfer.
If $2,500 is paid into an RESP in the calendar year, the federal government will match 20% to a maximum lifetime Canadian Education Savings Grant (CESG) of $7,200. The income earned on the CESG and contributions within the RESP are taxed in the recipient’s hands upon withdrawal, who will likely have a much lower marginal tax rate.
Contributions of up to $6,000 for 2019 and any unused contribution room from 2009-2018 can be made to the TFSA. The TFSA allows for tax-free investment income including interest, dividends and capital gains, which may result in higher growth compared to a regular taxable account. Tax-free withdrawals can be made at any time, but caution that any amount withdrawn is added back to your contribution room on January 1 of the following year.
Investment Tax Loss Selling
If you have sold shares and realized a gain in 2019, consider selling shares in your portfolio that have unrealized losses to offset the tax implications of the gain. Seek professional tax advice to ensure this loss is not denied, should you reacquire the shares you sold.