03 Dec The Lato Letter: Volume 4, Issue 4
As we approach the end of 2015, it is not too early to start thinking about tax planning for 2016. Padlock’s auditing firm, Segal LLP, recently published an excellent piece on some of the tax changes coming in 2016 and what you may want to do about them before the end of this year and into next year. With the permission of Dan Natale, the Segal partner responsible for Padlock, the entire article is included below.
Padlock has been very pleased with the service and advice provided by Dan and his team at Segal and so if you are in need of their expertise, let me know and I will make the introduction. Enjoy the article.
Act Fast to Head Off Potential Tax Changes in 2016
With the end of the year in sight, and tax changes expected from the new federal government leadership, tax planning may be more important than it’s been for quite some time.The timing of these changes is uncertain, but many believe they will take effect in 2016, as the Liberals aren’t likely to pass a budget before year end.
Middle-income earners who expect the federal tax rate to decrease in 2016 may want to defer income to 2016, where possible. For example, it may be possible to delay receiving bonuses or selling assets that have unrealized capital gains. It may also be useful to claim expenses, such as for RRSP contributions, in 2015.
High-income earners who expect their tax rate to rise in 2016 may want to receive as much income as possible in 2015 and defer expenses where possible.
Regardless of where you fall on the tax-rate spectrum, here are some tax and money-saving tips to keep in mind as we head into the final weeks of 2015.
Registered Retirement Savings Plan (RRSP)
You can wait until February 29, 2016, to contribute to your RRSP, but money added earlier than that maximizes tax-deferred growth. If you’ve already maximized contributions in earlier years, your contribution for 2015 is limited to 18% of income earned in 2014. The maximum contribution is $24,930, minus any pension adjustment.
In light of an anticipated increase in the top marginal tax rate for 2016, you may want to defer the deduction for your 2015 RRSP contribution until the 2016 taxation year. Before doing so, however, you should carefully consider other factors such as the effect on your cash flow as you’ll have to pay higher 2015 personal taxes.
If you’re thinking about withdrawing money to help buy a house or pursue educational goals, you can delay repayment by one year if you withdraw funds early in 2016, rather than late in 2015.
Also, consider holding interest generating investments such as bonds in your RRSP or other tax-sheltered vehicle. Interest income is generally taxed at the highest rate and you may be more likely to hold bonds to maturity in these accounts rather than react to any near-term fluctuations due to changes in interest rates.
Registered Education Savings Plans (RESP)
RESPs let you accumulate tax-efficient savings for children’s postsecondary education. Ottawa provides a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 of annual RESP contributions for each child — or $500 annually.
Each beneficiary who has unused CESG carryforward room can receive as much as $1,000 of grant money each year — up to and including the year in which the beneficiary turns 17 — to a lifetime limit of $7,200
If you make enhanced catch up contributions of $5,000 ($2,500 times two) for just over seven years, you will reach the maximum amount of grant money.
So, if your child or grandchild turns 17 in less than seven years, consider making a contribution by December 31 if you haven’t maximized your contributions.
As well, if your child or grandchild turned 15 this year and has never been a beneficiary of an RESP, no grant can be claimed in future years unless you contribute at least $2,000 by the end of this year. That will also create eligibility for CESGs for 2016 and 2017.
Something else to keep in mind is that if the beneficiary attended an eligible school this year, you might want to have Educational Assistance Payments (EAPs) made by December 31. The money will be included in the student’s income, but if the student has enough personal tax credits, the EAP money effectively will be tax free.
Registered Disability Savings Plans (RDSPs)
RDSPs are tax-deferred savings plans for individuals eligible for the Disability Tax Credit, their parents and other eligible contributors.
As much as $200,000 can be contributed to the plan until the beneficiary turns 59, with no annual limits. The contributions aren’t tax deductible, but earnings in the accounts are tax-deferred.
Ottawa provides matching Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) until the year the beneficiary turns 49. The government will contribute as much as $3,500 CDSG and $1,000 CDSB for each year of eligibility, depending on the net income of the beneficiary’s family.
If you contribute to a plan before December 31 you’ll get this year’s assistance. However, unused CDSG and CDSB room can be carried forward for as long as 10 years.
RDSP holders with shortened life expectancy can withdraw up to $10,000 annually from their RDSPs without repaying grants and bonds.
To make a withdrawal in 2015, a special election must be filed with Canada Revenue Agency (CRA) by December 31.
Tax Free Spending Accounts (TFSA)
You can contribute to your TFSA at any time. Under the current law, you can put as much as $10,000 into a TFSA for 2015, as long as you’re aged 18 or older and a resident of Canada.
The new government has stated that it will cut the contribution amount back to $5,500, but it’s unlikely this change will be effective this year. As a result, it’s worth considering making the full $10,000 TFSA contribution for 2015.
Also, if you’re at least 18 years old and have been a resident since 2009, you can contribute as much as $41,000 in 2015 if you haven’t previously contributed to a TFSA.
If you withdraw funds from a TFSA, an equivalent amount of TFSA allowable contribution room is reinstated in the following calendar year (assuming the withdrawal wasn’t to correct an overcontribution).
However, if you withdraw and recontribute in the same year without sufficient contribution room, you may be penalized. You can avoid the overcontribution problem by directly transferring funds or securities from one TFSA to another.
If you plan to make a withdrawal in 2016, consider doing it by December 31, 2015. That way, you wouldn’t have to wait until 2017 to recontribute the money.
Split Income with a Prescribed Rate Loan
If you live in high tax rate territory, you might want to have some investment income taxed by your spouse, common-law partner or children who are in a lower tax bracket.
But if you just give them money to invest, income from the investments may be attributed back to you and taxed at your high marginal tax rate.
To avoid this, lend investment money to those individuals with a loan bearing interest at the government’s prescribed interest rate. That quarterly rate is 1% until the end of the year. If you issue the loan before December 31, that 1% interest rate will be locked in for the full term of the loan, even if the prescribed rate increases and you could benefit from this income-splitting strategy starting next year.
Caution: The interest for each calendar year must be paid by January 30 of the following year to avoid attribution.
The type of investment will affect the tax paid by the lower income family member. Consider investments that yield Canadian dividends. That way, the investor can claim a dividend tax credit.
Claiming that credit and the basic personal amount means a certain amount of dividends can be received tax free by family members who have no other income.
Check with your adviser about how this works in your province, as well as other tax-saving steps you can take before 2015 ends
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.
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