As the holiday season approaches most of us are focused on spending time with family and friends. It’s also the opportune time to implement final income tax strategies and be mindful of how existing and new tax changes can effectively reduce your 2019 tax bill. Here is a laundry list of strategies to consider for 2019.
Contribute to a Tax-Free Savings Account (TFSA)
Effective January 1st, 2009, annual contributions can be made into a TFSA up to a cumulative total of $63,500 (including 2019). Investment income earned and withdrawals from a TFSA are tax-free, giving you the financial flexibility to save for specific goals without the impediment of taxes. Consider contributing to your TFSA before year-end and consider making your 2020 contribution in January 2020 to take advantage of the tax-free income and withdrawals that a TFSA provides. Also, if you expect to withdraw money from your TFSA in 2020, consider withdrawing the funds by year-end 2019 so that you don’t have to wait until 2021 to re-contribute those funds.
Contribute to a Registered Disability Savings Plan (RDSP)
If you or a loved one is a Canadian resident, is less than 60 years of age, has a valid SIN and qualifies for the Disability Tax Credit (DTC) (form T2201 can be filled out by your doctor or nurse practitioner and filed with the CRA), an RDSP may be established to assist in securing the financial future for a beneficiary with a disability. In addition, a beneficiary can access the federal non-refundable disability amount of $8,235 resulting in federal tax saving of $1,235 (plus provincial tax savings). While contributions to an RDSP are not tax deductible, investment returns earned inside the RDSP grow on a tax-deferred basis for as long as the funds remain in the plan. There are no annual maximum contribution limits, but rather a lifetime limit of $200,000 that can be contributed at any time up to the end of the year in which the RDSP beneficiary reaches the age of 59.
What makes RDSPs so appealing are the generous government grants and bonds that can go a long way to boosting the savings in the RDSP. Depending on the family net income of the person with a disability, the beneficiary may qualify for matching government contributions in the form of a Canada Disability Savings Grant (CDSG), equal to as much as $3,500 on the first $1,500 of contributions. In addition, the government will provide an annual Canada Disability Savings Bond (CDSB) of up to $1,000 based solely on family net income, and not on contributions. As a result, RDSPs are a great opportunity for beneficiaries with disabilities to increase savings for retirement.
Maximize RDSP government grant and bond carryforward
RDSP carry forward rules allow you to carry forward unused CDSG and CDSB entitlements for a period of 10 years, to an annual maximum of $10,500 for CDSGs and $11,000 for CDSBs. If you have unused CDSG and/or CDSB entitlements from previous years, a contribution of $3,500 to an RDSP before year-end may entitle you up to $10,500 of CDSGs, and possibly $11,000 of CDSBs if this is a newly established RDSP. This is of particular importance if you are age 49 by the end of this year as this will be your last opportunity to access any unclaimed grant or bond entitlements.
Investors should consider the following strategies for their RRSP:
Make your RRSP contribution on time
RRSP contributions must be made no later than 60 days after the calendar year-end in order to deduct against 2019 earnings. The RRSP contribution deadline is March 1st, 2020, and the maximum RRSP contribution limit for 2019 is $26,500. Make your contribution as soon as possible as you will have more money working for you sooner. Refer to your 2018 Notice of Assessment/ Reassessment, which will inform you of your available RRSP contribution limit. Any excess contributions exceeding $2,000 are subject to a 1% per month penalty tax.
Make the most of your unused RRSP contribution room
If you have contributed less than the maximum permitted in prior years to your RRSP, you should have unused RRSP contribution room carried forward to 2019. Consider topping up your RRSP to the maximum possible in order to take advantage of the benefits RRSPs have to offer. If you’re short on cash to maximize your RRSP room, consider borrowing to make your RRSP contribution.
Contribute to a spousal RRSP
If you have a spousal RRSP established, make your spousal RRSP contribution before year-end to minimize the possibility of having the attribution rules apply on any future withdrawals. For example, if you make a spousal RRSP contribution this year, your spouse can safely withdraw funds from the spousal plan and pay tax on the income as early as January 1st, 2022. A spousal RRSP contribution made in January 2020 will mean that your spouse will have to wait until January 2023 before he/she can safely withdraw funds without the attribution rules applying.
Contribute to a spousal RRSP if your spouse / CLP passed away this year
Where your spouse/CLP passed away with unused RRSP contribution room this year, the executor of the estate (which may be you) should consider making a final contribution to a spousal RRSP by March 1st, 2020. This will provide tax savings as the RRSP contribution can be deducted against income on the deceased’s final tax return.
Base withdrawals on age of younger spouse/CLP
If you will be 71 at the end of 2019, you must convert your RRSP to a RRIF and begin drawing an income. Consider basing the minimum RRIF withdrawal on the age of the younger spouse. Your minimum annual RRIF income could be lowered, allowing more money to be retained in your RRIF account, to benefit from a longer tax deferral.
Delay HBP withdrawals until after year-end
The Home Buyer’s Plan (HBP) is a great way to help fund a down payment for a home. However, there are some tricky rules that can be handled more easily if you delay your withdrawal until after year-end. Repayments begin two years following the year of withdrawal. Delaying your withdrawal until after year-end allows you more time to purchase a home, make more withdrawals under the plan and extend the time before you must begin repaying funds to your RRSP.
Make your required HBP repayment
You are required to begin your HBP repayments in 2019 if you participated in the program prior to 2018. To avoid any unnecessary income inclusion, be sure to make your required repayment and designate it on Schedule 7 of your personal tax return. Check your latest Notice of Assessment from the CRA for more information if you’re unsure of your repayment. If you are a first-time homebuyer, don’t forget to claim the 15% federal non-refundable tax credit available for up to $5,000 of the purchase cost. The maximum credit is $750.
Consider missing your HBP repayment
As discussed above, failure to meet your minimum HBP repayment creates an income inclusion. However, in some instances it may work to your advantage to intentionally miss the repayment.
Consider this strategy if you are in an unusually low-income year, or where the funds were borrowed from a spousal RRSP and your spouse/CLP is in a lower tax bracket. HBP withdrawals are not subject to the spousal RRSP attribution rules and therefore the income inclusion will fall in the hands of the annuitant spouse – another great way to income split!
Did you sell your principal residence in 2019?
Tax rules enacted in 2016 require you to report the sale of real estate dispositions including your principal residence even if the gain is exempt. If a property is not reported, fines amounting to $100/month up to a maximum of $8,000 can be incurred. The “one plus” rule will no longer apply for principal residences acquired in a taxation year in which the purchasing individual was not resident in Canada.
Do you hold foreign property in excess of $100K?
The T1135 Form was changed in 2015 to introduce a simplified reporting method for individuals who own specified foreign property with a total cost of $100,000 or more but less than $250,000 at any time throughout the tax year. Simplified reporting requires the taxpayer to only declare what types of property are held by the taxpayer (i.e. funds, shares, real property, etc.), the three countries holding the most specified foreign property by cost, the income from the specified foreign property, and the total gains or losses from the disposition of all foreign property in the year. Individuals who own specified foreign property with a total cost of less than $100,000 throughout the taxation year are exempt from T1135 reporting, while individuals who own specified foreign property with a total cost exceeding $250,000 at any point in the taxation year are not eligible for simplified reporting.
Know your U.S. filing requirements
If you are a U.S. person (i.e., citizen, resident or green card holder of the U.S.) living in Canada throughout 2019, be aware of various U.S. reporting requirements in addition to U.S. income tax filings. Some examples include the FinCEN Report 114 (also known as FBAR) if you own financial accounts (registered and non-registered portfolios) in excess of $10,000 USD at any time during 2018, Form 8938 – Statement of Foreign Assets, if you own certain assets that exceed either $200,000 USD at the end of 2018, or $300,000 USD at any time during the year if you live in Canada. In addition, if you are a U.S. person and contribute to, or are a beneficiary of an RESP, you may need to file Form 3520/ 3520-A in the U.S. This form may also need to be filed in the U.S. if you own a Tax-Free Savings Account. These forms have various deadlines and penalties for non-compliance and are dependent on assets you own throughout 2018. These are complex issues and should be dealt with by a qualified cross-border tax advisor.
Beware of PFIC reporting obligations
If you are a U.S. person holding a non-registered portfolio consisting of Canadian mutual funds and ETFs, you are considered to be a shareholder of a Passive Foreign Investment Corporation (PFIC) for U.S. tax purposes and are required to file IRS Form 8621 with your U.S. tax return. PFIC shareholders are subject to negative U.S. tax implications. One method to reduce the tax impact and eliminate nasty interest and penalty charges is to file a Qualified Electing Fund (QEF) election when you file your U.S. tax return. QEF elections are only available where mutual fund companies are able to provide you with an Annual Information Statement (AIS) with respect to your investment holdings. Work with your financial advisor to determine whether the PFIC rules apply to you, and what you can do to minimize the tax impact.
Claim a “Closer Connection Exception”
If you, like many Canadians (i.e., snowbirds) spend on average approximately 4 months in aggregate of the year in the U.S., you may be automatically considered a U.S. resident for U.S. tax purposes if you meet a specific days test in the U.S., known as the “substantial presence test”. As a result, you may be subject to U.S. tax and filing requirements even though you are Canadian resident and pay Canadian taxes. However, if you meet this test, you can avoid being considered a U.S. resident by claiming that you actually have a closer connection to Canada. To claim the closer connection exception, you must file Form 8840 with the IRS and meet other conditions. Speak to a tax professional if, during 2019 and in the previous two years, you have spent time in the U.S. and may benefit from this exception.
Taxpayers with pensions, income plans and government benefits also have opportunities to minimize tax by implementing the following strategies:
Make an advanced RRSP contribution
If you will be 71 at the end of this taxation year and expect to have earned income in 2020 or future taxation years, consider making an RRSP over contribution in December 2019. Earned income in 2019 creates RRSP contribution room for 2020. However, you will not be permitted to contribute to an RRSP next year, since you are required to convert your RRSP to a RRIF before year-end. This strategy does mean that you will have over-contributed for one month and hence subject to a 1% per month penalty tax. However, you will also be entitled to an RRSP deduction in 2019 or future taxation years that will provide tax savings which far outweigh the penalty tax cost. If you took advantage of this strategy in 2018, don’t forget to file a T1-OVP form to calculate the penalty tax cost.
Apply for government benefits (OAS & CPP/QPP)
If you have reached age 60 in 2019, consider applying for your CPP/QPP retirement pension benefit. When you apply for CPP before the age of 65, your pension will be adjusted to reflect a longer time period that you will receive benefits. There are new rules that apply to those collecting CPP benefits early, including changes to how your pension is adjusted and also the continuation of paying premiums if you continue to work prior to age 65.
If you have reached age 65 in 2019, you should also apply for Old Age Security (OAS) benefits as soon as possible. Do not delay your application after turning 65, since retroactive payments are only available for up to 11 months plus the month in which you apply for OAS. You may also choose to delay your OAS for up to five years and receive increased benefits.
Create eligible pension income
Rules were introduced in 2006 that allow for spouse’s/CLP’s to allocate up to 50% of pension income that qualifies for the existing pension income tax credit to their spouse/CLP, as a means of income splitting. If you are 65 this year or more and have no other eligible pension income, consider drawing on your RRIF in order to take advantage of the income splitting opportunity presented with these rules. Additionally, if your spouse / CLP is also over the age of 65, you and your spouse/CLP will both qualify for the pension income tax credit. Therefore, in addition to the tax savings from income splitting, you will receive tax savings from the pension income tax credit – a double benefit!
Opt out of CPP premium payments
Under new rules for CPP retirement benefits, pensioners receiving CPP prior to age 65 and still working are required to continue paying CPP premiums. If you turn age 65 this year, continue to work and are collecting CPP, consider filing an election to cease CPP premium payments. The election is CRA form CPT30 and must be filed with your employer and the CRA. Discuss the pros and cons of opting out of CPP premiums with your advisor.
CPP enhancement (after 2018)
Effective January 1, 2019, contributions and benefits under CPP will increase, from one-quarter to one-third of pensionable earnings each year. These changes consist of two phases. The first phase will start from 2019 to 2023. CPP contribution rate currently is 4.95%, which will be increased by 0.15% in each of 2019 and 2020, by 0.20% in 2021 and by 0.25% in each of 2022 and 2023. So, by 2023 and every year thereafter, each employee and employer will be contributing 5.95% annually, for a combined total of 11.9% from the current 9.9%. Phase two is a two-year phase of increasing YMPE limit. It will be set to 7% over YMPE in 2024, and then be set to 14% over YMPE in 2025 and later, which means that the extended earning range will be increased by 14% (2024-2025), projected YMPE to be $82,700 in 2025 while $55,900 in 2018. This new policy will provide more retirement security for Canadians, which might affect your retirement planning.
Employees receive a number of taxable benefits that can be dealt with tax efficiently by following some of these strategies:
Pay interest on loans
If you have received an employee loan, a taxable benefit may exist if you pay anything less than the prescribed interest rate set by the CRA. To avoid the taxable benefit, ensure any interest owing on the loan is paid by January 30, 2020.
Reduce the stand-by charge and operating benefit
Employer provided vehicles are a great perk, but can have nasty taxable benefits in the form of a standby charge and operating benefit if you’re not careful about tax planning. To reduce the possible stand-by charge, reduce the number of days between today and year-end that the car is available to you. Also, the operating benefit could be reduced to half of the standby charge if the vehicle was used 50% or more of the time for business purposes. Finally, consider reimbursing your employer for any operating costs by February 14, 2020.
Reduce source withholdings
If you expect a refund when you file your tax return, due to RRSP contributions, interest deductions on investment loans, charitable donations, alimony or maintenance payments, consider speaking to your employer about reducing source deductions from your pay. Alternatively, consider filing form T1213 with the CRA so that you can reduce your tax bill now, rather then waiting until April 2020 to get your refund.
Investors should consider the following strategies for their portfolios:
Initiate trades before the investment deadline
If you are planning to sell an investment at a loss in order to offset it against capital gains this year or in the past three years, the settlement date must fall in 2019. For most securities and mutual fund trades, you will need two business days for the transaction to settle.
Trigger accrued losses before year-end
You may own securities or mutual funds which have dropped in value from the time you purchased them. If so, now might be a good time to review these investments with your financial advisor to determine whether it is prudent to continue to own it. If not, it may be time to sell the investment to trigger the capital loss.
Capital losses are used to offset capital gains and can be carried back three taxation years and carried forward indefinitely. If you have taxable capital gains this year or in the previous three taxation years consider triggering the capital loss before year-end. It is preferable to carry back losses to the earliest year possible since the oldest years will expire first. Additionally, you could have realized capital losses of previous years that can reduce the current year’s capital gain. Either way, these strategies will potentially help you reduce your 2019 tax bill. If your intention is to trigger a capital loss this year consider the superficial loss rules as it will deny the capital loss if the same or similar investment is repurchased within 60 days of the sale by an affiliated person. The denied loss is added to the ACB of the investment which reduces the capital gain when the investment is eventually sold.
Treat capital gains appropriately
Capital gains are realized when capital property is disposed and proceeds in excess of the original cost are received. Capital gains are taxed more favorably compared to fully taxable business income. Also there are additional opportunities available to further minimize capital gains tax. Here are some ideas to consider:
- If you have unused capital losses, they can be used to offset your realized capital gains.
- Crystallize In-trust for (ITF) accounts where the beneficiary has little or no income.
- Consider delaying any sales to early 2020. Doing so allows a one year deferral by pushing your tax bill to April 2021 as the transaction is reportable in the 2020 taxation year.
- Provided a capital property is disposed of with a significant inherent gain, structure the sale so proceeds are received over a few taxation years. The capital gains reserve can allow 1/5th of the capital gain to be taxable when proceeds are received over a maximum five-year period. See a tax professional who can assist you with this strategy.
- Claim the $848,252 lifetime capital gains exemption (LCGE) if you’re selling qualifying small business shares (QSBC) or $1,000,000 exemption available on the sale of qualified farm / fishing property. Even if you do not plan on selling your QSBC shares, farming / fishing property, consider crystallizing the shares / property in order to bump up the ACB of your shares / property. This is a highly complex area of tax law. It is advisable to speak to a tax professional about this strategy.
- Investors with non-registered mutual fund portfolios may have been impacted by a fund merger potentially exposing the investor to capital gains tax if the fund appreciated in value from when purchased. To reduce the tax burden, refer to the tax and estate planning white paper on tax strategies for fund mergers.
Transfer investments to a minor child
Consider transferring investments that have dropped in value to a minor child before the taxation year-end. You will trigger a capital loss that can be used to offset realized capital gains this year, in the previous three taxation years or in the future years. In addition, any future growth of the investment is taxable to the minor child, since the attribution rules do not apply to capital gains.
Donate securities to charity
A donation to a registered charity by year-end provides valuable tax credits. If you are planning to donate to charity, consider directly donating publicly traded securities, mutual funds or segregated funds that have appreciated in value, instead of cash. You will receive a donation receipt equal to the fair market value of the investment at that time and any resulting capital gain will be tax exempt.
Families have a number of last minute ideas that can help reduce total combined tax. Here are a few ideas:
Identify income-splitting opportunities
Families have the ability to creatively split income so that their tax bill can be reduced. Here are some popular ways families can income split to reduce taxes for 2019 and subsequent taxation years:
a) Set up a prescribed rate loan with your spouse / CLP
b) Create second generation income
c) Swap assets with family members
d) Transfer assets to adult or minor children
e) Contribute to a spousal RRSP
f) Apply for CPP retirement pension sharing
g) Consider RESPs for a child’s education
h) Consider splitting up to 50% of eligible pension income
Contribute to an RESP
In addition to the income splitting opportunities available with the use of RESPs, there are other important benefits of RESPs that you should take advantage of before year-end. Contributions to an RESP entitle you to a grant, known as the Canada Education Savings Grant (CESG) of up to $500 per year, or $1,000 if there is unused grant room to a maximum of $7,200 per beneficiary. Consider contributing at least $2,500 to an RESP by year-end to receive the maximum CESG for this year, or possibly more if you have unused grant room from previous years. If you haven’t started an RESP for your growing children it may not be too late to maximize the CESG. In fact, if your child is age 10 or younger, you still have the opportunity to maximize the CESG. Also, if your child is age 15 and you have never started an RESP for that child, consider contributing at least $2,000 by year-end. Otherwise, your child is not eligible to receive any CESG at age 16 or 17, regardless of whether RESP contributions are made in those years.
Do you have non-deductible debt?
Have you incurred debt for personal and investment purposes? Interest on personal debt is not deductible so consider paying off personal debts first before debts incurred for investment purchases. Interest incurred to earn income from a business or property is generally deductible against the income.
Do you have deductions that will be worth more if made next year?
Consider the timing of a deduction – perhaps a deduction is worth more to you next year provided you fall in a higher tax bracket. This can be useful for RRSP planning.
Installment payments
Based on your 2018 taxes payable, you may have been required to make 2019 installment payments. CRA submits a recommended payment schedule; this does not need to be followed if you expect your 2019 tax bill to be far less, therefore your Dec 15th installment payment may not be required.
Take advantage of various tax credits
The tax credit for teachers and early childhood educators provides a 15% federal refundable tax credit on the cost of supplies up to $1,000. The Federal tuition non-refundable tax credit can reduce the students tax bill first and up to $5,000 can be transferred to certain individuals. If you are in a trade or taking a language course, you may also qualify. Speak to your financial advisor for more information.
The Home Accessibility Tax Credit (HATC) is a federal non-refundable tax credit (max $1,500) that can be claimed by an eligible individual for expenses (max $10,000) intended to improve accessibility to a home for a person 65 or over or a person eligible for the disability amount. Home accessibility expenses can also be eligible for the medical expense tax credit which can be made directly from the for the Canada Caregiver Credit is a 15% non-refundable tax credit and is available whether or not you live with family members you are helping. Expenses incurred up to $6,986 for the care of dependent relatives (i.e., parents, brothers and sisters, adult children and other specified relatives) are available and an additional $2,182 of expenses incurred for the care of a dependent spouse/CLP or minor child with an infirmity. The credit will be reduced on a dollar-for-dollar basis where the dependent’s net income exceeds $16,405 (indexed for inflation for subsequent taxation years). You will need to provide original copies of receipts to claim any of these tax credits.
Canada Child Benefit (CCB)
The UCCB was replaced with the CCB starting July 2016. The CCB is a tax-free monthly payment made to eligible families, of $6,496 per year for each eligible child under the age of six and $5,481 per year for each eligible child aged 6 to 17. An additional benefit of $2,771 for a child eligible for the disability tax credit. The benefit is reduced when adjusted family net income exceeds $30,450 and is dependent on the number of children per family. The max is phased out when adjusted family net income is $65,975.
Pay child care expenses to adult children
Consider paying your adult children (over age 18 in the year) for any qualifying child care services they provided to you for your younger children (age 16 or younger) throughout the year. The services must be incurred to allow you, the parent, to earn employment or business income. Qualifying child care expenses are tax deductible in the year they are paid. The income is taxable to the adult child, who is likely taxed at a very low to zero tax rate. This is a great way to income split with your family. The maximum child care expenses that can be claimed is $8,000 per child under 7, $5,000 for children between 7 and 16 and $11,000 for children eligible for the disability tax credit. Usually child care expenses must be claimed by the lower income spouse.
Have you moved residences to start a new job?
If the move allows you to be 40 km closer to the new work location you could be able to deduct real estate fees on the sale of the old residence and land transfer taxes on the purchase of the new residence (other expenses available). The matter can get complicated so it is best to discuss with your tax professional to see if you qualify.
Accelerate medical expenses
Medical expenses can be claimed for any 12-month period up to the end of the year and only provide tax savings where they exceed the lesser of a) 3% of your net income or b) $2,302. Therefore, accelerate medical expenses for you, your spouse / CLP and children before year-end in order to maximize tax savings.
Review trust income
Trusts are established for a variety of purposes. Consider working with your financial advisor or tax professional to determine how much income was earned in the trust and how much income, if any, should be flowed out to the beneficiaries. Special care should be taken where Henson Trusts are established to ensure distributions from the trust do not affect any government disability benefits for the disabled beneficiary.
2019 is quickly coming to an end. Therefore, if you wish to consider any of these strategies, contact our office to assist you in implementing any strategies that benefit you.