Clients are beginning to receive their T4s, T5s, T3s and RRSP contribution slips in the mail, so tax filing will soon be top of mind. Whether you prepare returns or not, clients may turn to you for advice on reducing tax and making their filing as seamless as possible.
Here are six ways to help clients reduce taxes.
1. Split pension income
Pension income splitting has now been around for nearly nine years; however, the opportunity is often overlooked. If your clients received eligible pension income in 2014, they may be able to shift up to half to their spouse or common-law partner (CLP).
What is eligible? It depends on the type of pension income received and your client’s age. For example, income from a company pension plan is eligible for pension income splitting regardless of age. Other forms of pension income, such as income from a RRIF or a life income fund (LIF/LRIF) are eligible only if the client is older than 65.
Pension income splitting makes sense when the pensioner has a spouse/CLP in a lower tax bracket. While the pensioner can shift 50% of his income, the optimal amount to allocate may actually be less than 50%. For instance, imagine a couple where the husband has $40,000 of income, and the wife has $60,000 of income. If $30,000 of the wife’s income is eligible pension income (i.e, income from a company pension plan), she could transfer up to $15,000 (50% of $30,000) to her husband. But, she may only need to allocate $10,000, because at that point, each spouse would have equal incomes of $50,000, achieving maximum tax savings.
You can consult a tax specialist or use commercially available tax programs, most of which have optimization calculators.
2. Maximize capital losses
If your clients triggered any capital losses during 2014, including through tax-loss selling, put those losses to use. Capital losses are reported on Schedule 3 of the T1 personal tax return and are first applied against capital gains earned during 2014. If capital losses exceed capital gains in 2014, the losses can then be carried back to 2013, 2012 or 2011 and applied to capital gains reported in those years.
It usually makes most sense to apply losses to the oldest years first as those losses will expire first. Doing so will allow your clients to recover taxes already paid in previous years. Capital losses not applied in the current year or in any of the three previous years may be carried forward indefinitely for use in a future year.
3. Share dividends
Generally, the income earner must report investment income; it can’t be reported by a spouse/CLP without devising a proper, and sometimes sophisticated, tax plan. However, special rules allow taxable Canadian dividends from two spouses/CLPs to be combined and claimed by either spouse/CLP without negative tax consequences.
This treatment is beneficial if one spouse/CLP is the sole income earner, and the other spouse/CLP has little to no income. In such a case, it may make sense to report all dividends earned by both spouses/CLPs on the higher-income-earning spouse’s/CLP’s return. While the tax liability may increase for the high-income spouse/CLP, it will also result in a bigger spousal amount claimed by the higher-income-earning spouse/CLP. The tax savings from the increased spousal amount may be greater than the tax liability on the increased dividends reported, reducing the overall family tax bill.
There are no partial transfers permitted; it is all dividends or nothing. Also, there are no special forms necessary to transfer these dividends to the spouse/CLP.
4. The Family Tax Cut
A brand new opportunity now exists for families with minor children to save income taxes through the new Family Tax Cut available for 2014 and subsequent years. The Family Tax Cut allows income from the higher-income spouse/CLP to be taxed in the hands of the lower-income spouse/CLP to reduce their combined income taxes payable. The most that can be taxed in the lower-income spouse’s/CLP’s hands is $50,000, and this option is available if the couple has minor children living with them. They’ll get a federal non-refundable tax credit to reduce their federal taxes payable, not their provincial taxes. The maximum savings under this new measure is $2,000.
5. Combine charitable donations
Charitable donations provide tax savings through a two-stage donation tax credit system. The first $200 provides a federal tax credit of 15%, and any donations above $200 attract a tax credit of 29%. There are also provincial tax credits to consider, so the total savings will vary by province. Spouses/CLPs can combine donations and claim them on one tax return. This is highly recommended since it will maximize tax savings by only having to exceed the low-rate threshold once.
If you have clients who have donated any securities or mutual funds in-kind to charity, there is a 0% capital gains inclusion rate, meaning that they will be exempt from paying income tax on the realized capital gains. And, any clients considered first-time donors may be eligible for higher charitable tax credits on up to $1,000 in cash donations to charity.
6. Foreign property reporting
Reporting on foreign assets has undergone significant changes recently, and CRA seems to be enforcing compliance. If you have clients that owned foreign property at any time throughout 2014, and the total cost of that foreign property exceeds CDN$100,000, they must tick “yes” to the question on page 2 of their personal tax return. Answering yes will require the client to disclose all foreign holdings, the geographic location of those holdings, and any income those investments generate on Form T1135 Foreign Income Verification Statement.
Examples of foreign property include amounts in a foreign bank account, foreign stocks (excluding Canadian mutual funds with foreign holdings), and real estate situated outside of Canada (but not personal-use vacation property). The penalties for failing to disclose this information are $25 per day to a maximum of $2,500. Also, there are new forms and ways to report foreign property designed to make it simpler on Canadians, and the T1135 can now be filed electronically.
Help your clients understand their reporting obligations. Better yet, there may be an opportunity to structure their foreign holdings to avoid the T1135 reporting in the future.