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Tax Tips for Year-End

1. Tax on Split Income
Starting 2018 and onwards, every single individual resident in Canada who receives or realizes an amount derived from a private corporation, partnership or trust will need to understand the Tax on Split Income (“TOSI”) rules.

Income splitting with non-active family members is severely restricted or not available under the new TOSI rules.

TOSI rules do not apply to salaries paid out of a private corporation.

Income which is caught under the TOSI rules will be taxed at the highest marginal tax rate (currently, 53.53% for residents of Ontario).

The complexity of the rules will result in the need for specific tax advice wherever TOSI has potential application. A detailed analysis will require a thorough examination of the circumstances of the recipient, the source of income, the nature of the business, and the rules themselves.

2. Tax on Passive Income

Starting 2019 and onwards, the owner of a Canadian controlled Private Corporation (“CCPC) will have to be familiar with the new Tax on Passive Income rules (“TOPI”). Under the new TOPI rules, every $1 of passive income earned in excess of $50,000 will reduce the small business deduction of a CCPC or associated group by $5. No small business deduction will be available if passive income of the CCPC or associated group exceeds $150,000. Passive income earned in the previous taxation year will determine the small business deduction availability for the subsequent year. As the new passive income rules will take effect for taxation years starting on or after January 1, 2019, you should mitigate the passive income earned in 2018

The TOPI rules have other complexities which need to be mitigated and you should contact SB Partners to review the tax consequences and possible alternatives available to you.

3. Compensation
If you are the owner-manager of a Canadian Controlled Private Corporation (“CCPC”), you should consider a mix of salary, bonus, and dividends for your compensation package. Generally speaking, a bonus is preferred over salary for the Corporation, since the payment and the remittance of the related withholdings taxes can be deferred up to 180 days after the corporation’s year-end.

Salaries and bonuses are both classified as earned income for the purpose of computing your RRSP contribution limit for the subsequent year. However, dividends are not taken into consideration for the purpose of the RRSP contribution limit.

If you employ a spouse and/or children, consider paying them a reasonable salary or bonus. This may result in a tax savings if your spouse and/or children are at a lower marginal tax rate than you are.

The payment of salaries and bonuses at year-end may also help to reduce your corporation’s federal active business income below $500,000 and take advantage of the lower corporate tax rates.

Debts you (don’t pay the premiums)or your family members owe to your corporation must be repaid within one year following the end of the corporation’s taxation year during which the loan was made to you. Even if the loan is non-interest bearing the borrower must report an interest benefit on their tax return. However, there are some exceptions to this rule. If you borrowed money from your corporation, you should contact SB Partners to review the tax consequences and possible alternatives available to you.

4. Tax Loss Selling
Review your investment portfolio with a view to triggering losses if you had net gains in 2015 through 2018. This strategy will allow you to reduce capital gains for 2018 and possibly recover taxes paid on capital gains reported in 2015 through 2017.

Don’t forget the superficial loss rules. These rules deny a capital loss where you acquire the same property 30 days before or after selling it. The rules also apply if someone affiliated to you (e.g. your spouse or a corporation you control) buys or sells the property in the same time period.

You cannot claim a capital loss on the disposition of property to your RRSP or your TFSA.

You cannot claim a capital loss on the transfer of property to your spouse, but you can effectively transfer the loss to your spouse so that he or she can claim it on an ultimate sale.

If you plan to sell shares to trigger losses in 2018, consider deferring the sale of shares with accrued gains until January 2019. This will maximize the losses available in 2018.
If you have losses carried forward from prior years, consider triggering gains before year-end to be sheltered with these losses.

The last day for trading through a Canadian exchange that can be settled in 2018 is Thursday, December 27th.

5. Contribute Up to $26,230 to Your RRSP Account
Friday, March 1, 2019, is the last day for making a contribution to your RRSP that you can deduct on your 2018 tax return. However, if you turned 71 in 2018 the last day to make the contribution is December 31, 2018.

Be sure to check your 2017 Notice of Assessment from CRA to confirm your 2018 RRSP contribution room for 2018. An over-contribution in excess of a $2,000 cushion will attract a penalty tax of 1% per month.

6. TFSA Maximum Contribution of $57,500
Canadian residents, age 18 and older, can contribute up to their unused TFSA contribution room. If you were 18 years of age or older in 2009 and have never contributed to your TFSA, you may be able to contribute up to $57,500 in 2018. For 2019, the maximum annual TFSA contribution will be $6,000.

7. Charitable Donations
Remember that donating publicly traded shares which have appreciated in value, instead of cash, can be a tax-efficient way of making a gift. The donation receipt will be for the fair value of such share and no tax is payable on the gain.

Tax Deadlines to Remember

December 17, 2018Final quarterly installment of tax due for 2018
December 27, 2018Final trading day on which to settle a trade in Canada for 2018
December 31, 2018Final payment date for a 2018 tax deduction or credit:

  • Interest on investment loans
  • Fees to advisors
  • Custodial fees
 Pay alimony and maintenance
 Pay child support (if deductible)
 Make charitable donations and political contributions
 Pay childcare
 Pay tuition fees and interest on student loans
 Pay medical expenses
 Contributions to your own RRSP if you turn 71 in 2018
January 1, 2019Earliest date for 2019 TFSA contribution of up to $6,000
January 30, 2019Pay interest on investment loans within the family
March, 2019Final day for 2018 RRSP contribution
 For taxpayers who died in 2018, last day for contributions to a surviving spouse’s RRSP and obtain a deduction in deceased’s terminal tax return
 Home Buyer’s Plan repayment due
March 15, 2019Pay first 2019 tax instalment

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