Year-end tax planner 2018: Planning for personal tax updates
TAX ALERT |
Mineral Exploration Tax Credit (METC) for flow-through share investors— The mineral exploration tax credit has been extended by one year, up to March 31, 2019.
Home relocation loans deduction—Beginning in 2018, the deduction available for qualified home relocation loans will be eliminated. As a result, the full amount of the interest, from the prescribed rate to the actual rate, is now taxable.
Voluntary Disclosure Program (VDP)— The criteria for acceptance under the program has been tightened as of January 1, 2018.
Overall—In the following types of cases, the VDP program no longer applies:
- the disclosure concerns money derived from proceeds of crime
- the disclosure concerns a corporation with gross revenues of over $250 million, in at least two of the last five taxation years
- the disclosure relates to a transfer pricing adjustment or penalty
Payment covering the estimated taxes owing must now be remitted with the submission.
Also, where a taxpayer receives guidance from an advisor in applying for the VDP, the CRA mandates that the taxpayer must include the name of that advisor in the application.
Income tax disclosures— These now consist of two tracks: The general program and the limited program.
- Where the general program is concerned, the taxpayer may disclose reasonable errors and non-compliance in circumstances involving failures to file returns, only when no gross negligence or deliberate avoidance of tax is apparent. General program taxpayers qualify for penalty and partial interest relief and avoid criminal prosecution. That said, there is limited interest relief and it is only available in respect of the years preceding the three most recent years filed.
- Under the limited program, relief exists for ‘major non-compliance’, defined as, but not limited to, the following situations:
- the disclosure occurs after an official CRA statement or following CRA correspondence or campaigns;
- concerted efforts to fend off detection through the use of offshore vehicles and the like;
- non-compliance spanning multiple years;
- significant dollar amounts;
- the sophistication of the taxpayer;
- situations wherein a high degree of taxpayer culpability contributed to the non-compliance.
In this program, taxpayers remain liable for late-filing penalties and interest. A taxpayer may gain relief from gross negligence penalties or prosecution.
No-name process—The existing no-names disclosure process has been replaced with a no-name, informal, non-binding, general, pre-disclosure discussion process. It does not constitute acceptance into the VDP program. It also has no impact on the CRA’s ability to audit, penalize or refer a case for criminal prosecution.
Registered Disability Savings Plan (RDSP)— Qualifying plan holders - If an adult RDSP beneficiary lacks the capacity to be the plan holder, the Income Tax Act requires the designation of a legal representative, which can be a lengthy and expensive process. A temporary federal measure exists to allow a qualifying family member (i.e., a parent, spouse or common-law partner) to be the plan holder of the beneficiary’s RDSP, should the adult beneficiary not have a legal representative in place. This temporary measure has been extended to the end of 2023.
Provincial personal tax highlights
Low-income individuals and families tax (LIFT) credit - Ontarian’s will benefit from the Low-income individuals and families tax (LIFT) credit effective January 1, 2019, where a person who works full time at minimum wage (earning nearly $30,000) would pay no Ontario personal income tax.
Personal tax credits/amounts—Alberta intends to increase the non-refundable tax credits for basic personal and spousal amounts to $18,915, effective 2018.
New caregiver credit—Effective for 2018, this credit replaces the infirm dependent tax credit and the caregiver tax credit.
Education tax credit—Effective as of 2019, this credit will be eliminated. Any amounts not utilized from previous years can be claimed in 2019 as well as subsequent taxation years.
Tax liabilities—For certain eligible Canadian controlled private corporations (CCPC), balances on tax liabilities need to be paid within three months after year-end and within two months for final corporate tax liabilities.
Income to family members—Family members who work in the company can be paid a salary — bear in mind that these amounts must be reasonable or CRA may challenge them. Salaries rather than payments allow family members to show earned income for childcare expenses, RRSP and CPP purposes. The new tax on split income (TOSI) rules must also be considered when making income distributions to family members.
Shareholder loans— Such loans must be paid no later than one tax year after the end of the tax year that the money was borrowed.
Dividends or salaries—If you require less personal cash from the business, consider retaining a certain amount of income in the corporation to acquire the tax deferral; remember that corporate rates are lower than personal rates.
If the shareholder is subject to personal dividend tax at a rate exceeding the corporate dividend refund rate — currently 38.33 per cent — then distributing dividends that trigger a refund of refundable tax on hand may not provide a tax benefit.
Owner-managers must ascertain the most tax effective salary-dividend mix, one that minimizes overall taxes for the corporation and all affected individuals. Consider the impact of alternative minimum tax (AMT), RRSP contribution room ($145,722 of earned income in 2017 is required to maximize the RRSP contribution room in 2018), personal marginal tax rates, the corporation’s tax rate, Canada Pension Plan (CPP) contributions, provincial health and/or payroll taxes as well as other personal deductions and credits which may be able to be utilized.
Remuneration accruals—Should a bonus accrue at year-end, the amount must be paid 179 days following the year-end. All applicable source deductions must be remitted on time.
Depreciable assets— In order to enhance access to capital cost allowance (CCA), purchase equipment before the end of your fiscal year and keep in mind the available for use rules. Also, a special election exists whereby you can treat leased fixed assets as purchases under a financing arrangement.
Taxable capital—Your corporation’s taxable capital needs to be monitored for federal tax purposes. Your company will begin to lose access to the small business deduction and the 35 per cent refundable ITC for SR&ED expenditures if taxable capital exceeds certain limits. Keep the following in mind:
- Use excess cash to pay down debt;
- Declare dividends;
- Planned dispositions that will result in income need to be deferred to after year-end;
- Get the most out of federal and provincial refundable and non-refundable tax credits.
in order to recover capital gains tax paid in previous years, trigger capital losses.
Business income reserve—A reserve on sale profits may be claimed when sale proceeds from real property or goods—classified as inventory—are not due until after the year-end. This reserve can be claimed over a maximum of three years.
Capital gains reserve—If the proceeds of disposition are not due until after the year-end, you may claim a capital gains reserve on the sale of capital properties. This reserve can be claimed over a maximum of five years.
Personal services business—Consideration should be given to whether it is economically feasible to carry on business through this type of business, as the federal corporate tax rate for personal services business is 33 per cent.
If you have investments, here is what you need to know
Pooled Registered Pension Plan (PRPP)—If you do not have access to an employer-sponsored pension plan, joining a PRPP is a viable option. PRPPs are voluntary savings plans much like defined contribution RPPs or RRSPs.
Tax-Free Savings Account (TFSA)
- Eligible investments that are subject to higher tax rates (i.e., interest and foreign dividends) can be held in this vehicle.
- Any Canadian resident aged 18 or older can open and contribute to a TFSA. Withdrawals and income earned are not taxable; neither are contributions.
- $5,500 is the eligible contribution amount.
- Time withdrawals to take place before year-end, as amounts withdrawn are not added to your contribution room until the beginning of the following year.
RRSPs, RPPs and DPSPs—If you decide not to contribute your maximum RRSP allowance for 2018, your ability to do so carries forward indefinitely. If you contributed less than the maximum allowable amount to your RRSP in a previous year, the unused contribution room can be accessed in addition to your normal contribution room in a following year. However, even if you do not need the deduction in 2018, it is worth contributing if you have excess funds. These funds then begin to grow on a tax-deferred basis and you are able to claim the deduction in any future year.
Registered plans—contribution limits
Basis for deduction
Dollar limits 2018
Dollar limits 2019
Registered retirement savings plan (RRSP)
18% of earned income in the previous year
Defined contribution registered pension plan (RPP)
18% of the pensionable earnings for the year
Deferred profit-sharing plan (DPSP)
As an employee, pay attention to these items
Employee stock options from public companies
- If you liquidate your stock options for cash, check with your employer as to whether they can forgo the tax deduction and allow you to claim it.
Upon the exercise of public company options, employers must withhold and remit income tax equal to the taxable benefit realized.
Corporate vehicle— If you operate a company vehicle, you can minimize your operating cost benefit and/or standby charge benefit in the following manner:
- Reduce personal driving time to less than 50 per cent of the total driving time, if possible; and
- Reimburse your employer for part or all of the personal use portion of the actual operating costs — make sure the payment is received by February 14, 2019.
To minimize or do away with your standby charge benefit, you can:
- Stop personal driving; and
- Limit your access to the vehicle (i.e., don’t use it every day)
Employment-related courses— Ask your employer to pay directly for educational courses that relate to your job.
Gifts and awards—Non-cash gifts and non-cash awards with an annual value of $500 or less may not be taxable if given to you as personal gifts. Ask your employer to look at this option.
Employee loans— Minimize your taxable benefit on employee loans by paying the interest from 2018 on or before January 30, 2019.
Home office— Ask your employer to complete form T2200, which allows you to claim expenses related to the maintenance of your home office.
Other personal tax matters of interest
Capital gains and losses—If you have capital gains in 2018, or in any of the previous three years (2017, 2016, or 2015), look at selling an asset with an accrued loss. This can be offset first against capital gains from 2018; any excess can be applied against gains from these previous years to recover tax. Keep in mind the superficial loss rules discussed below, before triggering losses. If you have little to no other income or have capital losses to use, sell an investment that has appreciated in value and reinvest the proceeds to trigger capital gains before the end of the year. Taxpayers can use the proceeds to reinvest in the same investment that was sold to trigger the capital gain.
Shares of an eligible small business corporation can be disposed and reinvested in another eligible small business, provided that certain conditions are met, thereby deferring the recognition of capital gains. Such transactions must occur by April 30, 2019.
Superficial loss rules—If you hold an asset with an accumulated loss and wish to sell it to offset said loss against any realized capital gains, the superficial loss rules will apply to deny the capital loss if you purchase the same asset within 30 days. The superficial loss rules exist to stop taxpayers from claiming a capital loss on an asset the taxpayer clearly intends to keep. These rules would also apply if your spouse or a company controlled by you or your spouse purchases the asset within the same time frame.
- Under both the Income Tax Act and other administrative requirements of the CRA, donations of private corporation shares will encounter certain restrictions if such requirements are not met, private corporation shares may still be subject to capital gains tax.
- Registered charity donations are usually viewed as deductions for corporations and tax credits for individuals.
- Capital gains tax is not charged on donations of public company shares.
Interest deductibility—If you are incurring non-deductible interest and have cash or investments available, you may wish to consider paying some of the non-deductible debt and then borrowing to replace it. However, bear in mind that gains may be triggered if the investments are liquidated.
Foreign charities and gifts
Foreign charities qualify as donees, provided that:
- They pursue activities in the national interest of Canada;
- They receive a gift from the government;
- They are involved in humanitarian aid or urgent disaster relief.
- Qualified dividends could be tax-free if paid to persons in lower tax brackets or who have large numbers of non-refundable tax credits, such as tuition credits
- Eligible dividends may trigger AMT
Child-care expenses—Available deductions for child-care expenses have not changed since 2017. Boarding school and camp fees qualify for the childcare deduction, with certain restrictions. Be sure to pay 2018 childcare expenses by December 31, 2018, and keep your receipts.
Registered Education Savings Plan (RESP)
- Asset transfers between RESPs for siblings are now acceptable, with certain conditions applying.
- Plan RESP contributions to take advantage of the maximum lifetime Canada Education Savings Grant (CESG) of $7,200.
Income splitting—The recently enacted tax rules regarding split income (TOSI) should always be kept in mind when contemplating income splitting. An income splitting plan with family members in lower tax brackets may help to reduce your family’s overall tax liability.
Splitting income with minors—Beginning in the 2015 taxation year, the income attribution rules apply to ‘split income’ that is allocated to a minor from a partnership or a trust, provided that:
- The income comes from a business or a rental property;
- A relative the minor is actively engaged in the operations of the trust or partnership to earn income from any business or rental property or has a direct or indirect interest in the partnership.
Estate planning—Make sure that your will is current and ensure that your estate plan meets the needs of today as well as any future objectives.
Registered Disability Savings Plan (RDSP)—If your child is eligible for the disability tax credit, it is recommended that you:
- Create an RDSP to qualify for the Canada disability savings bond, which provides a maximum lifetime of amount $20,000 per child;
- Regularly add savings to an RDSP to qualify for the Canada disability savings grant, which offers families a maximum lifetime amount of $70,000 per child.
Tax credits for tuition, education and textbooks
As of January 1, 2017, both the federal education and textbook tax credits have been eliminated. However, the federal tuition tax credit still exists.
Unused education and textbook credit amounts may be claimed in 2018 as well as subsequent taxation years. If you are not able to use your education, tuition or textbook tax credits, you may wish to transfer them to your spouse, parent or grandparent, subject to certain restrictions.
Lifetime Learning Plan (LLP)—A withdrawal from your RRSP can be made tax-free to purchase full-time education for yourself, your spouse or your common-law partner. For students who meet one of the disability conditions, part-time education is also an option. Withdrawals up to $10,000 in a calendar year and up to $20,000 in total are allowed.
Moving expenses— You may be able to deduct your moving expenses, provided that you moved:
- to a home which is closer, distance-wise, to a new work location;
- to a new house to pursue your education.
Planning for your retirement
RRSP—If you turned 71 in 2018, your RRSP needs to be wound up. You may:
- Defer taxes on all or part of the amount in your RRSP by moving the funds to a registered retirement income fund (RRIF);
- Add savings to your RRSP only until December 31, 2018, if you have RRSP contribution room available or earned income from the previous year;
- If you have unused RRSP contribution room or earned income in the previous year, contributions to your spouse’s RRSP are allowed up until the end of the year that your spouse reaches age 71.
Canada Pension Plan (CPP)—If you are between the ages of 65 and 70, you can elect to stop contributing to the CPP. This election can be rescinded the following year. Bear in mind that if you begin collecting CPP benefits before you turn 65, overall CPP benefits will be reduced.
Pension plans—If you have a defined benefit RPP that was created primarily for you, you must begin making minimum withdrawals once you pass the age of 71.
Income from pensions—If you are age 65 or older, you will require at least $2,000 of pension income to maximize your pension credit. Consider splitting your pension income with your spouse or common-law partner to a maximum of 50 per cent.
Old Age Security (OAS)—Explore additional options to manage your income (i.e., through a corporation), in order to avoid the OAS clawback. Pension income from a spouse or dividends may trigger an OAS clawback if total income is over the OAS threshold. Certain investment measures, such as generating capital gains, can help.
Trust reporting requirements— Prior to 2018, trusts that neither earned income nor made distributions within a year were typically not required to file an annual (T3) return. However, Budget 2018 proposes that as of 2021 and subsequent taxation years, express trusts residing in Canada (i.e., trusts created with the express intent of the settlor) and non-resident trusts must file an annual T3 return. No exceptions are allowed.
Inter vivos trust—If you reside in a province with a high probate fee and are age 65 or older, an inter vivos trust is an important part of your estate plan.
Testamentary trust— As of 2016, the graduated tax rate that applies to a testamentary trust created by a person’s death was replaced with a flat top marginal rate, provided the testamentary trust had existed for more than three years. The graduated tax rate continues for testamentary trusts aged 36 months or less as well as trusts with beneficiaries who qualify for the Disability Tax Credit.
- Graduated rates apply only to a ‘graduated rate estate’; these include:
- A testamentary trust estate for only the first 36 months after the testator’s death. As such, an ongoing estate or a testamentary trust created in accordance with a will, such as a spousal trust, would benefit from the graduated tax rates only for its first three years;
- A testamentary trust created to support a disabled individual who would qualify for the federal disability tax credit.
- All other trusts, both inter vivos or testamentary, are taxed at a flat rate equal to the top personal income tax bracket (33 per cent federally). The provincial tax rate also applies.
- If a trust is not a graduated rate estate, the following provisions exist:
- Quarterly instalments must be made, with the balance due on March 31st of the following year;
- Is required to have a calendar year-end;
- Does not qualify for the $40,000 AMT exemption;
- Must not make ITCs available to its beneficiaries;
- Cannot apply for a refund after the normal reassessment period of 36 months, rather than the ten-year period available for individuals and graduated rate estates in accordance with the taxpayer relief rules;
- Will be allowed to file a Notice of Objection only within 90 days of the Notice of Assessment, rather than one year after the filing date of 90 days after the year's end.