Make sure your clients end the year on a high note by considering tax now, before the new year begins.
Topping the list of considerations are new rules for income splitting and passive investment income for Canadian-controlled private corporations.
While planning for those changes is important, EY is reminding business owners who haven’t taken advantage of income splitting to do so in 2018. “This planning may be more important this year than in the past, due to other income-splitting opportunities becoming more limited in 2018 onward,” says the firm in a release.
Income splitting can also be accomplished with prescribed rate loans and spousal RRSPs.
For example, clients can loan funds to a family member at the current prescribed interest rate of 2%. The family member can then invest the money, with investment income not attributable to the client, as long as interest for each calendar year is paid no later than Jan. 30 each subsequent year. Thus, clients must pay interest before Jan. 30, 2019, for loans made in 2018 or earlier years, says the EY release.
While splitting income in retirement remains an option, spousal RRSPs can be used to split income earlier, says the EY release. A higher-income spouse or partner can receive the benefit of contributions made to a spousal plan and, after a three-year non-contribution period, the lower- or no-income spouse can withdraw funds at their own tax rate.
Other tax considerations
The tax rate on non-eligible dividend income is increasing for dividends received on or after Jan. 1, 2019, notes the release. A CIBC report says the combined federal/provincial tax rate on these dividends will increase by 0.58 to 0.97 percentage points depending on the province. As a result, “it may be worthwhile to shift income and expenses between 2018 and 2019, where feasible,” says the CIBC report.
Clients should also consider reducing or eliminating non-deductible interest, i.e., interest on funds borrowed for personal purposes. “Where possible, consider using available cash to repay personal debt before repaying loans for investment or business purposes on which interest may be deductible,” says the EY release.
Improving the cash flow impact of tax payments is another consideration. “If you expect your 2018 final tax liability to be significantly lower than your 2017 liability, you may have already paid enough in instalments,” says the release, referring to the Dec. 15 instalment payment.
Finally, for extra credit, EY says business owners should consider succession planning.
“If you’re already strategizing from a tax perspective, step back and ask yourself how you’d like your business assets to be passed along to the next generation,” says David Steinberg, EY Canadian tax leader, private client services, in the release. “It could make a big difference for the future of your company.”