It’s that time again. The year is almost done, and it’s time to take advantage of tax-planning strategies that will reduce your income tax burden for the 2017 tax year. We’ve collected the top 2017 tax-reduction strategies from our Canadian tax lawyers.

Top 2017 Tax-Planning Tips for Businesses

Take advantage of business tax planning strategies that will reduce your income tax burden for the 2017 tax year. Our Canadian tax lawyers provide their top tax reduction strategies for taxpayers who earn business income. 

Time Your Expense Claims

Taxpayers earning business income should accelerate and incur their deductible expenses before the year-end rather than realizing those expenses in 2018. Employees may write off depreciation on cars, planes, and musical instruments. Likewise, tradespersons and apprentices can deduct the cost of their tools—to a prescribed limit.

Similarly, individuals should make their purchases now so that they may enjoy the benefit of the corresponding depreciation claim this year. Purchase your capital property before the tax year end in order to claim Capital Cost Allowance (CCA)—at 50% of full rate—this year.

Claim Your Allowable Business Investment Losses (ABIL) 

An Allowable Business Investment Loss is a loss on an investment on a small business’s shares or debt. A taxpayer may deduct an ABIL from any source of taxable income. Standard capital losses, in contrast, are only deductible against capital gains. 

To claim your allowable business investment losses this tax year, you must sell the investment shares or establish the investment debt as reasonably uncollectible.

Pay Out Bonuses to Enjoy the Small Business Deduction 

A Canadian Controlled Private Corporation (CCPC) enjoys a reduced income tax rate on its first $500,000 of active business income. A bonus declaration is a key tax strategy for CCPCs with active business income exceeding $500,000. In particular, to the extent that its income exceeds $500,000, the corporation declares a bonus to its owner-manager. 

This bonus must be paid and all payroll deductions remitted within 180 days of the company’s year-end. If the company fails to pay the bonus within this deadline, it cannot deduct the bonus in the year of declaration. This means that the corporation would fail to “bonus down” its income and thus incur tax at the general corporate rate on the amount exceeding the $500,000. 

Pay a Reasonable Salary to Your Spouse or Family Member 

A business owner may pay a reasonable salary to a spouse or family member working for the business. This effectively splits income and lowers the overall household tax rate, and it provides family members with RRSP contribution room. 

A salary paid to a family member employee must be reasonable given the tasks that the employee performs. In case of a future tax audit, the business owner must produce proper books and records. So, taxpayers must ensure strict compliance with the record-keeping requirements of Canada’s Income Tax Act to avoid tax problems.

Give Your Employees Non-Taxable Gifts

A business owner may deduct business expenses of up to $500 annually for non-cash gifts given to each arm’s length employee. But if you give your employee more than $500 worth of gifts in a year, the employee must include the excess in his or her income as a taxable benefit, and you must withhold CPP and income tax on that amount. Moreover, the $500 annual allowance does not apply to cash gifts or performance-related awards.

Similarly, once every five years, an employer may deduct $500 for non-cash long service awards or anniversary awards given to each employee. The Canada Revenue Agency (CRA) requires the award to be for a minimum of 5 years’ service and, you must wait at least 5 years before giving another award to the same employee.

Enhance Your Compensation Strategy

A compensation strategy includes a mix of salary, bonuses, and dividends. In particular, a bonus allows income—and thus the related tax liability—to be deferred until after the year-end. A corporation can immediately deduct the amount of a declared bonus if it pays the bonus within the statutory deadline. Meanwhile, the recipient only needs to report the bonus when he or she receives it, which could be in the new year. So, if arranged properly, the bonus provides an accelerated deduction at the corporate level and a deferred inclusion at the personal level.

Repay Shareholder Loans from Your Corporation 

When you borrow funds from your own corporation, those funds are included in your taxable income if the loan remains outstanding for two corporate year-ends. So, you must ensure that you repay shareholder loans before this deadline. 

Avoid or Reduce Interest Fees on Tax-Instalment Payments

If you make quarterly tax-instalment payments, you can avoid interest charges by making your final payment on or before December 15, 2017. Likewise, if you missed an earlier instalment payment deadline, you can reduce interest by either increasing the amount of your final instalment payment or paying your final instalment earlier than the December 15^th deadline.

Consider the Individual Pension Plan (IPP)

Owner-employees of incorporated businesses can pursue an Individual Pension Plan (IPP) as a means of retirement saving. The IPP provides an opportunity for year-end corporate income tax deductions for the corporation’s contributions to the plan.

Top 2017 Tax-Planning Tips Using Charitable Donations

Of course, charitable donations serve an altruistic purpose. But your charitable donations can also reduce your overall tax burden. Our Canadian tax lawyers provide their top year-end tax-reduction strategies using charitable donations.

Don’t Miss Out on the First-Time Donor’s Super Credit: It’s Gone After 2017

A first-time donor receives an additional 25% tax credit on his or her first $1,000 in charitable donations. You’re a “first-time donor” if neither you nor your spouse or common-law partner has claimed a charitable-donation tax credit any time after 2007. So, if your household has never donated before, the first-time donor’s super credit offers a means of significantly reducing your tax bill.

But you need to act now: The first-time donor’s super credit disappears after 2017.

Pay Attention to Your Deadline

 If you wish to claim your donation tax receipt on your 2017 income tax return, you must donate to your registered charity by December 31, 2017. 

If you donate after this deadline, you will need to wait until 2018 to claim your donation tax receipt. You will also lose out on your last chance to claim the first-time donor’s super credit.

Donate Securities to Avoid Potential Taxable Gains

Instead of donating cash, you can donate publicly-listed securities to a qualified charity. You’ll receive a donation tax receipt equal to the fair market value of the security at the time of the donation. In addition, by donating the securities to a registered charity, you won’t incur tax on the accrued gain. (Gifting the securities to a non-qualified donee would result in a disposition at fair market value and thus a taxable gain if the market value exceeds cost.) 

If you plan on donating securities—and wish to receive the tax credit this year—the transfer must take place before December 31^st. As a result, you should start this process soon to allow time for processing and settlement time, which typically takes at least five business days.

Don’t Forget About Your Corporation

You may want to consider making donations through your corporation if you own one. Individuals get donation tax credits, but corporations can deduction donations from taxable income. Moreover, donations of capital property can increase the capital dividend account of your private corporation. Your corporation can then pay this amount to you tax-free.

Note: you’ll need to compare the benefits of donating personally versus through your corporation. Personal donations might result in greater tax benefits due to the lower corporate tax rates.

Gift Your Life Insurance

You can make a donation of a whole-life insurance policy, which is a policy combining insurance with an investment fund. You donate by transferring ownership of the policy to the charity and by naming the charity as the policy beneficiary.

Generally, the tax value of the donation is the policy’s fair market value minus any outstanding policy loans. But, if the tax value exceeds your tax cost of acquiring the policy, you must report the excess as income.

After donating the policy to a charity, you may claim your subsequent premium payments on the policy as additional charitable donations.

Finally, your estate may be able to claim a donation tax credit if you name a charity as a beneficiary of your life insurance in your will. The estate can claim the credit in either your terminal tax return or your tax return for the year before your terminal year. Similar rules apply if your will names a charity as the beneficiary of your RRSP or RRIF.

Top 2017 Tax-Planning Tips for Investments

Our Canadian tax lawyers provide their top year-end tax reduction strategies concerning investments.

Withdraw Strategically from Your Tax-Free Savings Account (TFSA)

A TFSA allows you to earn tax-free income—i.e., dividends, interest, and capital gains—from investments that you hold in your TFSA. You can only contribute up to a specified amount to your TFSA each year. For instance, for 2017, you may contribute up to a maximum of $5,500. This contribution limit does not include income earned from the investments already sitting in your TFSA.

You can also make a tax-free withdrawal from your TFSA whenever you wish. Any amount that you withdrawal from your TFSA is added to your contribution limit on January 1^st of the following year. 

So, if you plan on withdrawing funds from your TFSA in the near future, you benefit by doing so on or before December 31, 2017. This allows you to replace the funds on January 1, 2018 instead of waiting until 2019. 

Maximize Tax-Deferred RRSP Contributions

If you wish to deduct your RRSP contributions on your 2017 tax return, your contribution deadline is March 1, 2018.

But, given that you have contribution room, an early contribution—that is, a contribution before the year end—will go a long way in maximizing your RRSP’s tax-deferred growth through compounding of returns.

Defer Capital Gains Tax Until 2019

You may want to hold off until 2018 before selling any investments with accrued capital gains. If you sell and realize those gains this year, the resulting tax payable must be sent to the CRA by April 30, 2018. On the other hand, if you sell and realize the gains on or after January 1, 2018, your tax bill isn’t due until April of 2019.

You also reduce the amount of any 2017 net capital losses that you can apply to prior tax years if you realize capital gains in 2017. Before you can apply a net capital loss against a prior year’s capital gains, you must apply that loss against the current year’s gains. 

Realize and Carry Back Your Capital Losses

If you own any investments with accrued losses, consider selling those assets and realizing the losses before the end of 2017. This will allow you to offset your 2017 capital gains. Of course, you should always consider whether your loss-position assets still meet your investment objectives. 

You cannot, however, claim a capital loss that is a superficial loss. A superficial loss occurs when you incur a loss upon selling a capital property and, within 30 days of your selling that property, you or a related party acquired and owned the same or an identical property. The superficial loss rule prevents taxpayers from creating artificial capital losses. Check with one of our Canadian tax lawyers to ensure that you don’t run afoul of these rules.

As mentioned, you may apply your losses against capital gains from previous tax years. In particular, once you apply a net capital loss against the current year’s gains, you may apply the loss against gains from the past three years or any future year. So, 2017’s capital losses are the last that you can apply against capital gains from 2014.

Delay Purchasing Mutual or Equity Funds

Any Canadian looking to purchase mutual or equity funds should wait until the start of 2018. Commonly, the net asset value of a fund unit includes income or capital gains that the fund has earned but not yet distributed to investors. If you buy units in a fund right before it makes a distribution—such as near the year end—you become entitled to receive that distribution, and you will be taxed on the distribution payment. Depending on the number of units you purchased, this may significantly increase your 2017 income even though you only held the units for a few days that year.

Top 2017 Tax-Planning Tips for Employees

Our Canadian tax lawyers provide their top year-end tax-reduction strategies for those hard-working employees.

Purchase Employment Assets Before the Year End

Generally, employees cannot deduct their work-related expenses. They can only deduct very specific expenses.

Employees who qualify can deduct capital-cost allowance—i.e., depreciation—on cars, planes, or musical instruments that they purchase. If you intend on making a qualifying purchase, you should do so before the year-end so that you can claim tax depreciation (CCA) on your 2017 tax return.

Take Your Clients to Dinner This Year

Ordinary employees cannot deduct the cost of a business lunch. But commissioned salespeople can deduct from their commission income 50% of their meal-and-entertainment expenses. You can claim these expenses on your 2017 tax return only if you incur them before the year-end.

Reduce the Taxable Benefit on Your Company Car

If you drive a car that your employer leases or owns, you receive a taxable benefit, which you must include in your taxable income.

The taxable benefit consists of two elements (1) a standby benefit and (2) an operating benefit. The standby benefit is based on the purchase or leasing cost of the automobile to your employer. The operating benefit is a portion of the amount that your employer pays in operating costs for your personal use of the company car.

You may reduce your standby benefit by reimbursing your employer for the vehicle’s purchase price or lease. But you must do so before your employer issues your 2017 T4 slips at the end of February 2018. Be sure to approach your employer to discuss this well in advance of the deadline.

The operating benefit that is included in an employee’s 2017 income is 25 cents for each kilometre of personal use. You can eliminate your 2017 operating benefit by fully reimbursing your employer for operating costs that your employer sustained for your personal use of the company car. You must do this before February 14, 2018. If you fail to reimburse or don’t fully reimburse by February 14, 2018, the 25 cent rate will apply to any outstanding operating costs. And this amount will be included as income in your 2017 tax return. On the other hand, if you reimburse your employer for costs that it sustained for your personal use of the company vehicle, you avoid including the operating benefit in your income. 

Pay Interest on Loans from Your Employer

An employee must include in his or her income a taxable employment benefit if that employee received an interest-free loan from his or her employer. The employee also incurs a taxable benefit if the loan charges an “unreasonable” rate of interest.

The Income Tax Act, in effect, stipulates an interest rate that will serve as the employee-benefit amount.

The employee can reduce or eliminate this tax liability by paying interest on employer loans. To avoid the tax liability, the employee must pay the required interest within 30 days of the end of the tax year. In 2017, the prescribed interest rate was 1% of the loan amount.

Adjust Your Source Deductions

Many employees eagerly await a huge refund when they file their tax returns. Don’t celebrate a large tax refund. Instead, you should think of the refunded amount as an interest-free loan that you have graciously given to our government. In other words, a large refund represents an inefficient use of your money.

So, if the amount that your employer withholds from your paycheque leads to a large tax refund, you may want to submit a revised Form TD-1 to your employer claiming deductions to reduce the withholding amount.

Receive more expert tips by signing up to Canadian MoneySaver Magazine for only $19.99/year here.

By David J Rotfleisch, CPA, CA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., 

www.Taxpage.com

david@taxpage.com