It was a whirlwind year for tax changes.
So Jamie Golombek, managing director of Tax and Estate Planning with CIBC Wealth Advisory Services, walks us through two of the biggest in anticipation of December 31.
Corporate-class fund changes
Up until December 31, corporate-class mutual funds will let a fundholder switch among the various classes without triggering a taxable disposition. After that, switches will be taxable.
Should clients make changes in anticipation of the deadline?
“It’s a great opportunity to rebalance a portfolio if it makes sense from an investment perspective,” Golombek says. If that’s the case, “do it before the end of the year so [you] don’t trigger any current capital gains on that rebalancing.”
But if a portfolio doesn’t require changes, “there’s probably no need to do anything this year, and we would just rebalance as appropriate.”
Read: What is a capital gain?
After switching becomes taxable, don’t hold off on necessary rebalancing. Even if clients have to pay capital gains taxes, “it means [they’ve] taken some profits, and that’s not a bad thing,” says Golombek. “This is a tax that eventually would have to be paid anyway—maybe you’re paying it earlier than you would like, but you have to make the appropriate investment decision.”
Principal Residence Exemption
The Principal Residence rules allow every family unit to sell one principal residence tax-free per year. “In the past, you didn’t even have to tell CRA about it,” says Golombek. “That’s changing.”
As of October 3, 2016, if a client wants to claim the Principal Residence Exemption, the sale must be reported on Schedule 3 of the T1 tax return, which is the capital gains form.
“CRA is drafting new versions of the Schedule 3 […] in which you’ll have to clearly indicate the disposition of a principal residence,” he explains. The form will require taxpayers to include the proceeds, the year of purchase, and whether they’re planning to claim the exemption.
“If you do not indicate that [information] on the form, then you do not get to claim the exemption,” warns Golombek. “And if you file the form late, […] there is a severe penalty that would apply for a late-filing.”
Other year-end tax tips
Golombek points out other tax issues unique to 2016. For example, it’s the final year to claim the Children’s Fitness and Arts credits, so he suggests that “if you’ve got expenses you might be able to prepay for 2017 and you’re not at the maximum, you might want to do that before the end of the year to get the full advantage for the final time in 2016.”
And, there are also two credits that can be claimed for the first time in 2016: the Home Accessibility Tax Credit (HATC) and the Eligible Educator School Supply Tax Credit.
For the HATC, clients can claim up to $10,000 in eligible home renovation expenses that make the home more accessible – “things like walk-in showers, grab bars, wheelchair ramps,” says Golombek. That claim will result in a maximum non-refundable tax credit of $1,500 ($10,000 at 15%).
He suggests, “You may want to spend the money before the end of the year to get that 15% federal credit in 2016. And maybe again in 2017, depending on the extent of the renovation.”
As for the educator credit, provincially certified teachers and early childhood educators can now claim up to $1,000 in eligible school supply costs. “You’ll be able to claim a 15% credit for the cost of those supplies,” says Golombek. But only consumable goods (like construction paper) and certain durable goods (i.e., games, puzzles, books, containers and software) qualify.
Other durable goods, such as computers, tablets and rugs, do not qualify.
For more tax news, read: