Now is a good time to revisit tax planning with your client as the Dec. 31 deadline approaches.
Top of mind this year for business-owner clients are tax changes for Canadian-controlled private corporations (CCPCs), which include expanded rules for tax on split income (TOSI).
One of those changes deals with income splitting and “the limited ability you have to pay dividends now, effective in 2018, to family members who are not directly involved in the business,” says Jamie Golombek, managing director of tax and estate planning at CIBC Financial Planning and Advice.
However, there are exceptions to the rule.
For example, family members who are shareholders and work in the business on average at least 20 hours per week are exempt from TOSI. Other exceptions depend on ownership and the age of the shareholder, says Golombek.
“For example, if a shareholder’s over 24 and owns at least 10% of the votes and value of the shares, then these new TOSI rules don’t apply,” he says, assuming the business meets certain conditions, such as not being a professional corporation.
Business owners have until Dec. 31 to satisfy the 10% ownership requirement so that dividends paid in 2018 won’t be subject to TOSI. If a private company has other shareholders, such as a spouse, partner or adult kids, then clients should “think about whether or not you’re going to pay dividends this year and whether or not the rules apply,” says Golombek.
He also suggests clients review the corporation’s share structure to determine if a corporate reorganization is warranted. That way, shareholders can own shares of different classes for tax purposes. Or, clients may want to change the share structure so that shareholders can qualify for the 10% ownership exception of votes and value, he says.
Also affecting business-owner clients are new rules for passive investment income effective for tax years after 2018, including a reduction in the small business deduction (SBD) for CCPCs with passive investment income between $50,000 and $150,000. The SBD is reduced to zero at $150,000 of investment income.
Golombek suggests clients plan for passive income now, since next year’s reduction to the SBD is based on certain investment income in 2018 (specifically, adjusted aggregate investment income).
One suggestion to reduce passive income by Dec. 31 is “making sure you’re taking out enough money to maximize RRSPs and TFSAs,” says Golombek, adding that an income of about $147,000 at 18% results in the maximum 2019 RRSP contribution of $26,500.
Another suggestion is to strategically realize gains and losses on investments. “Consider a buy-and-hold strategy to defer capital gains if a corporation is approaching the $50,000 threshold in 2018,” says Golombek in a report outlining his year-end tax tips.
Not new but noteworthy
Clients should also make sure they’re taking advantage of routine tax-planning opportunities, such as tax-loss selling, Golombek says. That involves selling investments with accrued losses at year end to offset capital gains realized elsewhere in a portfolio.
For the loss to be immediately available in 2018, the settlement must take place in 2018. With T+2 trading introduced last year, Dec. 27 is the last day to settle trades by Dec. 31 to realize gains or losses, says Golombek. Net capital losses that can’t be used in the current year can be carried back three years or carried forward indefinitely to offset net capital gains in other years.
For clients with U.S. or other foreign securities, foreign exchange must be considered. “There’s been big movement in the F/X rate over the years,” says Golombek. “Make sure that what looks like a gain [isn’t] a loss once you do the F/X conversion.”
Another tip: investors who repurchase a security sold at a loss should be aware of the superficial loss rule. That rule applies when an investor sells a security at a loss and buys it back within 30 days. In such a case, “your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security,” he says in the report. “That means any benefit of the capital loss could only be obtained when the repurchased security is ultimately sold.”
More tips to share
Other tax opportunities include paying certain expenses, such as investment-related expenses, by year end. “Make sure those are paid on non-registered accounts by Dec. 31 to get a tax deduction under investment counselling fees,” says Golombek.
Clients who turn 71 in 2018 have until Dec. 31 to make final RRSP contributions before converting their RRSPs to RRIFs or registered annuities.
For seniors or those eligible for the disability tax credit (DTC), renovations to make a home accessible qualify for the non-refundable home accessibility tax credit—worth up to $1,500 for work or goods paid for by Dec. 31.
Also, Registered Disability Savings Plan (RDSP) assistance for 2018 might still be available to clients if they act quickly, says Golombek.
“The government may contribute up to a maximum of $3,500 CDSG [Canada Disability Savings Grant] and $1,000 CDSB [Canada Disability Savings Bond] per year of eligibility, depending on the net income of the beneficiary’s family,” says Golombek in the report. The grant and bond are available up until the year the plan beneficiary turns 49, with the grant amount also based on plan contributions. As such, the report says that eligible investors—those eligible for the disability tax credit, their parents and other eligible contributors—might want to contribute to an RDSP before Dec. 31.
Further, “there is a 10-year carryforward of CDSG and CDSB entitlements,” says the report. “For beneficiaries who have been DTC-eligible since 2008, some CDSG and CDSB entitlements may be lost after 2018.”
Clients with medical expenses can claim a tax credit when expenses exceed the lower of 3% of net income or $2,302 in 2018. “If your medical expenses are less, maybe there are some other expenses you could pay late in the year to qualify over that threshold,” says Golombek.*
Finally, to receive a donation tax credit, charitable gifts must be made by Dec. 31.
“The best way to make donations is through gifts of appreciated securities,” such as stocks, mutual funds and segregated funds, says Golombek. “If you donate them to charity, you get a receipt for fair market value and you pay no tax whatsoever on the accrued gain.”
With year-end client discussions coinciding with the season of charitable giving, “why not remind clients that a great opportunity to make your charitable gift this year is through a gift of securities?” says Golombek. Depending on the province, it could save them as much as 27% in capital gains tax on the securities’ accrued gain.
For more tips, read the full CIBC report.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.
*An earlier version of this story included the example of prepaying medical expenses in order to meet the medical expense threshold. A CRA opinion has disallowed elements of this, and the example has been removed to avoid confusion. Return to the updated sentence.