With 2021 coming to an end, now is a good time to discuss year-end tax planning strategies with your Welch tax advisor. The effects from the Covid-19 pandemic can still be seen worldwide for individuals and businesses alike. If you or your business have been impacted, we can help you review your tax situation and advise on the best course of action. Depending on your situation, the following are some year-end tax tips that may help you and/or your business.
- Prescribed rate loan planning – consider locking into an income splitting loan arrangement with your family members or with a family trust at the current historically low prescribed interest rate of 1%. This is one of the few remaining income splitting strategies available and even allows for income splitting with minors. Income attribution rules will not apply as long as the interest on the loan is paid to the lender by January 30th of the following year.
- Capital losses – consider disposing of investments with accrued capital losses before the year-end. Note that the sale needs to happen before December 29th in order for the transaction to be effective this year due to the settlement date being two business days after the trade date. The realized capital losses can be offset against the current year’s capital gains. Any unused capital losses can be carried back to reduce capital gains realized in the previous 3 years in order to recover taxes paid in prior years. It is important that you, or a person affiliated with you, not repurchase the same or identical property within 30 days, as this will delay the use of the loss.
- Allowable Business Investment Loss (ABIL) – you may be able to claim an ABIL to offset any source of income if you dispose of shares or debt of a “small business corporation” at a loss. Discuss that with your Welch tax advisor to identify whether you would be qualified to claim an ABIL.
- Charitable donations – consider making charitable donations by December 31st to receive donation tax credits. Gifting of publicly traded shares instead of cash may increase the tax benefits of making the donation.
- RRSP contribution – consider contributing to your RRSP or your spousal RRSP now or within the first 60 days of 2022. If you are turning or have turned 71 years old in 2021, you must convert to a RRIF but, before you do, you have until the end of year to make an RRSP contribution.
- RESP contribution – consider contributing to your child’s or grandchild’s RESP before December 31. Employment and Social Development Canada will contribute 20% of your annual contributions up to a maximum of $500 per year for each beneficiary. If there is unused grant room from a previous year, the annual maximum can be increased to $1,000 (with a contribution of $5,000).
- Planning your move – if you plan on moving between provinces, it is recommended to move to the province with the lower provincial tax rate by December 31. Your province of residence is where you are living on December 31, therefore if you live in a province with a higher tax bracket, but move to a province with a lower tax bracket by December 31, your tax liability for the year will be based on the province with the lower rate.
- Year-end accrued bonus – consider accruing a year-end bonus to reduce your corporate income taxes for the current year, with the bonus only included on your T4 in the following year. You must ensure that the bonus is paid out within 179 days of the following year and the related payroll source withholdings are remitted to CRA.
- Paying a salary to a family member – you may consider paying a reasonable salary to a family member if the person has provided his/her services to your business. The key is that the salary amount should be reasonable, which means that it should be similar to a comparable market rate.
- Paying a dividend to a family member/shareholder – before you pay a dividend to a family member, consult with your Welch tax advisor because the dividend might be subject to “TOSI” (a special tax that applies to certain dividends), with the result that your family member may be taxed at the top personal marginal tax rate on that amount.
- Zero-emission vehicle – if you are planning to purchase a vehicle, consider purchasing a zero-emission vehicle including electric, hydrogen and hybrid vehicles because you may be able to deduct capital cost allowance up to $55,000 due to the enhanced first-year CCA rate of 100%. Not only good for taxes, also good for the environment.
- Delay the sale of depreciable assets – If you are planning to sell depreciable assets, consider selling them after your year-end to take advantage of an extra year of CCA claim.
- Inter-corporate dividends and capital gains – an inter-corporate dividend is generally tax-free to the recipient corporation (Holdco) when there is sufficient “safe income” on hand (generally retained earnings on a tax basis). A safe income computation is recommended to be completed prior to paying an inter-corporate dividend. However, when the Holdco does not have safe income on its Opco shares, the inter-corporate dividend is converted to a capital gain which will result in tax being paid by Holdco. While this means tax is paid sooner than otherwise, it can result in an overall tax savings. The effective tax rate as a result of this capital gains treatment comes to slightly less than 29%, whereas the top tax rate on eligible/non-eligible dividends is 39.3%/47.7%. This is complicated stuff – speak with your Welch tax advisor…..
- Estate freeze or re-freeze – If your business is experiencing a temporary decline in value as of result of the COVID-19 pandemic, an estate freeze or re-freeze of your ownership of the business may make sense since it caps the fair market value in your business at a lower value, which helps to limit your future income tax liabilities. A valuation of your business would be recommended in support of the value of the business.
- Where there is a plan to dispose of an asset at a gain in the near future, consider doing so now while we know that the capital gains inclusion rate is ½. Delaying the disposal of the asset runs the risk of the capital gains inclusion rate (and the capital gains tax rate) increasing by the time of the sale.
Consult your Welch LLP advisor to discuss whether any of these strategies may be appropriate in your situation.