When holiday season starts, so too does end-of-year tax season. Here are timely tips to share with clients.
“Every year, we talk about things that you need to do, and there are a couple of things that are different for 2017,” says Jamie Golombek, managing director for tax and estate planning at CIBC Financial Planning and Advice.
- Tax-loss selling after a year of strong returns. It seems odd to talk about tax-loss selling “in a year in which the markets have been up and where we’ve experienced extreme highs,” says Golombek. Yet there “may be a situation where you have a stock or fund in your portfolio that has not done well; maybe it’s in a losing position.” If that’s the case, he suggests telling clients they can “sell that particular stock or position, realize the capital loss and [then] use that to offset other winners in your portfolio that you realized gains on earlier in 2017.” Alternatively, he adds, “[clients] could take that loss, carry it back up to three calendar year, or even carry it forward for use in a future year.”
- Shorter settlement period for equity trades. In September, Canada shortened its settlement period to coincide “with T+2, or trade date plus two settlement days in American markets. So now, rather than having the previous three-day period, trades are settled in two days,” says Golombek. The implication of this for investors, he adds, “is if you want to have a tax-loss sale before the end of 2017, then you actually have until December 27” to do so. In past years, this had to be done before the Christmas statutory holidays, but investors now have extra time, says Golombek.
Changes for private corporations
The Liberal government’s changes involving private corporations are no secret. But make sure business-owning clients know how to prepare for them before year-end.
After the government amended the proposals in October, says Golombek, “we’re left with two” that need to be discussed.
The primary issue “is the issue of dividend sprinkling,” he says, since “2017 appears to be final year in which you can do this. In other words, if you have family members who are over age 18 and who are shareholders of your business, you may want to consider paying extra dividends in 2017 if those family members are in lower tax brackets.”
Under the proposed rules, starting Jan. 1, 2018, “any dividends paid to non-active family members who are shareholders will be taxable at the highest marginal rate,” says Golombek.
The second issue concerns passive investment income. On this topic, says Golombek, there’s nothing you or clients need to do before the end of the year. “The government has announced there will be full grandfathering on the retained earnings of passive [investment] income earned inside a corporation,” he adds, “so there’s no need to pull earnings out or put extra in.”
If other rules eventually come into play, he adds, “then the treatment of passive income is something to consider for future years.”
Don’t forget about donations
During year-end tax meetings, remind clients that 2017 “is the final year to claim the First-Time Donor’s Super Credit,” says Golombek. “Both the federal and provincial governments offer credits that can result in tax savings, but 2017 is the last year that you can claim the Super Credit if neither you or your spouse, or partner, have claimed any donations since 2008.”
Eligible clients will receive “an additional 25% credit on up to $1,000 of monetary donations. That means you could be looking at an effective total credit rate of more than 70%, depending on your income and province of residence.”