Tax Planning Tips for End of 2018

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Now that we are nearing year end, it’s a good time to review your finances. 2018 saw a number of major changes to tax legislation come in force and more will apply in 2019, therefore you should consider available opportunities and planning strategies prior to year-end.

Below, we have listed some of the key areas to consider and provided you with some useful tips to make sure that you cover all of the essentials.

Key Tax Deadlines for 2018 Savings

December 31, 2018:

  • Medical expenses

  • Fees for union and professional memberships

  • Charitable gifts

  • Investment counsel fees, interest and other expenses relating to investments

  • Student loan interest payments

  • Political contributions

  • Deductible legal fees

  • Some payments for child and spousal support

  • If you reached the age of 71 in 2018, contributions to your RRSP

January 30, 2019

  • Interest on intra-family loans

  • Interest you must pay on employer loans, to reduce your taxable benefit

February 14, 2019

  • Expenses relating to personal car reimbursement to your employer

March 1, 2019

  • Contributions to provincial labour-sponsored venture capital corporations

  • Deductible contributions to a personal or spousal RRSP

Family Tax Issues

  • Check your eligibility to the Canada Child Benefit
    In order to receive the Canada Child Benefit in 2019/20, you need to file your tax returns for 2018 because the benefit is calculated using the family income from the previous year. Eligibility depends on set criteria such as your family’s income and the number and age of your children and you may qualify for full or partial amount.

  • Consider family income splitting
    The CRA offers a low interest rate on loans and it therefore makes sense to consider setting up an income splitting loan arrangements with members of your family, whereby you can potentially lock in the family loan at a low interest rate of 2% and subsequently invest the borrowed monies into a higher return investment and benefit from the lower tax status of your family member. Don’t forget to adhere to the new Tax on Split Income rules.

  • Have you sold your main residence this year?
    If so, your 2018 personal tax return must include information regarding the sale or you may lose any “principal residence” exemptions on the capital gains from the sale and thus make the sale taxable.

  • If you’re moving, think carefully about your moving date
    If you are moving to a new province, it’s worth noting that your residence at December 31, 2018 is likely to be the one that your taxes are due to for the whole of the 2018 year. Therefore, if your move is to a province with higher taxes, putting your move off until 2019 may therefore make sense, and vice versa if you are moving to a lower tax province.

Managing Your Investments

  • Use up your TFSA contribution room
     If you are able, it’s worth contributing the full $5,500 to your TFSA for 2018. You can also contribute more (up to $57,500) if you are 27 or older and haven’t made any previous TFSA contributions.

  • Check if you have investments in a corporation
    The new passive investment income rules apply to tax years from 2018 and you therefore need to plan ahead if the rules affect you. They state that the small business deduction is reduced for companies which are affected with between $50,000 and $150,000 of investment income, therefore the small business deduction has been stopped completely for corporations which earn passive investment income of more than $150,000.

  • Think about selling any investments with unrealized capital losses
     It might be worth doing this before year-end in order to apply the loss against any net capital gains achieved during the last three years. Any late trades should ideally be completed on or prior to December 21, 2018 and subsequently confirmed with your broker. Conversely, if you have investments with unrealized capital gains which are not able to be offset with capital losses, it may be worth selling them after 2018 in order to be taxed on the income the following year.

Estate and Retirement Planning

  • Make the most of your RRSP
    The deadline for making contributions to your RRSP for the year 2018 is March 1, 2019. There are three things that affect how much you may contribution towards your RRSP, as follows:

    • 18% of your previous year’s earned income

    • Up to a maximum of $26,230 for 2018 and $26,500 for 2019

    • Your pension adjustment

Remember that deducting your RRSP contribution reduces your after-tax cost of making said contribution.

  • Check when your RRSP is due to end
    You should wind-up your RRSP if you reached the age of 71 during 2018 and your final contributions should be made by December 31, 2018.

Other Considerations

  • Make your personal tax instalments
    If you pay your final 2018 personal tax instalment by December 15, 2018, you won’t pay interest or penalty charges. Similarly, if you are behind on these instalments, you should try to make “catch-up” payments by that date. You can also offset part or all of the non-deductible interest that you would have been assessed if you make early or additional instalment payments.

  • Remember the deadline for making a taxpayer-relief request
     The deadline is December 31, 2018 for making a tax-payer relief request related to the 2008 tax year.

  • Consider how to minimize the taxable benefit for your company car
     The taxable benefit applied to company cars is comprised of two parts – a stand-by charge and an operating-cost benefit. If you drive a company car, it’s worth considering how to potentially minimize both of these elements. The taxable benefit for operating costs is $0.26 per km of personal use, therefore you should make sure that you reimburse your employer where relevant, by the deadline of February 14, 2019.

Contact us if you have any questions, we can help.

Why provide an employee benefits plan?

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Business owners are increasingly recognizing the key importance of implementing employee benefit plans in their organization and this is an area that has grown considerably in recent decades. Employee benefits comprise all of the additional things that you offer to your employees on top of their regular salary, which could include pension contributions, health cover / insurance policies, training and education programs etc. Employees are more and more interested in the total benefits package that a potential employer can offer them, rather than just being focused on a binary salary figure and recognizing and understanding this cultural shift in the modern working world is crucial to maintain your ability to recruit and retain the right talent for your business.

Many employees value the benefits that their employer offers, considering them an integral part of their take home pay, none more so than health cover. This benefit can provide financial and emotional security to your employees and their families, without the need for them to complete any health requirements to be on the plan. They are likely to benefit from a preferable level of cover and the plan may even provide them with insurance products such as long-term disability cover, which can be harder to gain outside of a group plan. What’s more, group plans often offer out-of-country emergency healthcare for employees which has the potential to save them money on personal travel insurance products.

Not only do these benefits provide a sense of security to your employees, they can also help them to feel valued as part of your organization, which may in turn foster higher morale and increased motivation within their roles. It is therefore worthwhile for business owners to encourage their teams to recognize the fact that the benefits package that you offer should be considered as an integral part of their take home pay, alongside their actual salary.

Talk to us, we can help.

Estate Planning for Business Owners

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Writing an estate plan is important if you own personal assets but is all the more crucial if you also own your own business. This is due to the additional business complexities that need to be addressed, including tax issues, business succession and how to handle bigger and more complex estates. Seeking professional help from an accountant, lawyer or financial advisor is an effective way of dealing with such complexities. As a starting point, ask yourself these seven key questions and, if you answer “no” to any of them, it may highlight an area that you need to take remedial action towards. 

  • Have you made a contingency plan for what will happen to your business if you are incapacitated or die unexpectedly?
  • Have you and any co-owners of your business made a buy-sell agreement?
  • If so, is the buy-sell agreement funded by life insurance?
  • If you have decided that a family member will inherit your business when you die, have you provided other family members with assets of an equal value?
  • Have you appointed a successor to your business?
  • Are you making the most of the lifetime capital gains exemption ($835,714 in 2017) on your shares of the business, if you are a qualified small business?
  • Are you taking care to minimize any possible tax liability that may be payable by your estate in the event of your death?

Estate freezes 

The process of freezing the value of your business at a particular date is an increasingly common way of protecting your estate from a large capital gains tax bill if your business increases in value. To achieve this, usually the shares in the business that have the highest growth potential are redistributed to others, often your children, meaning that they will be liable for the tax on any increase in their value in the future. In exchange, you will receive new shares allowing you to maintain control of the business with a key difference – the value of the shares is frozen so that your tax liability is lower and that of your estate when you die will also be reduced. 

Paying for Education

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Post-secondary education can be expensive, however having the opportunity to plan for it helps with making sure that you’re capable to meet the costs of education. In addition, when you have a plan, it’s easer to make financial decisions that align with your goals and provide peace of mind. In the infographic, we outline 7 sources of funds for paying for post-secondary education:

  • Registered Education Savings Plan
  • Tax Free Savings Account
  • Life Insurance
  • Scholarships, grants, bursaries
  • Personal Loans, Lines of Credit
  • Government Student Loan
  • Personal Savings

Why You Should Consider Critical Illness Insurance

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If I did a straw poll, I’m sure I’d find that the majority of those asked have some form of life insurance. The reasoning behind taking out this cover is usually centered around the desire to provide protection and security to their family and loved ones in the event of their death, which is clearly an admirable objective. But, if I asked the same group of people who of them had critical illness insurance – essentially, a policy that pays out if you become too ill to work – in all likelihood the number would be much smaller.

Why is this? It makes sense on paper that people would want to sustain their level of income in the event that they become disabled or too ill to work, yet some of the most common objections include the price, a preference to save themselves for such an event (often known as being self-insured) or simply a sense of denial that this could ever happen to them.

Critical illness insurance varies from policy to policy but typical conditions that it covers in Canada includes heart attack, stroke and cancer. Unlike other types of insurance that provide income replacement, if you are seriously ill, critical illness insurance provides a lump sum benefit that can be used in any way you choose.

The benefits of critical illness insurance

Whilst taking out any kind of insurance policy comes down to personal choice and one’s own individual circumstances, many independent financial experts recognize the benefits that critical illness insurance can offer. Here are some of them:

  • Whilst saving and self-insuring can seem like an attractive alternative, it simply isn’t an option for many. Even if you are fortunate enough to have the means to save for such an eventuality, you would need to be able to guarantee a solid and consistent return on your investment for it to outweigh the financial benefit of critical illness insurance – some estimates put this at a rate of around 10% return for 20 years.
  • Whilst some employers do offer company disability plans, they typically do not pay out the full amount of your pay cheque on an ongoing basis, which can have the potential to have a serious impact on your personal finances, just when you need such a worry the least. What’s more, one of the major advantages of a critical illness policy is that, if you are able to return to work and therefore begin earning again, you still have the benefit of the lump sum that has been paid out under the policy – offering you an incomparable measure of financial freedom to potentially pay off your mortgage or put your kids through university. Essentially, offering you much more financial freedom.

In short, there are no perfect answers in the area of your personal finances, but if you are looking for an option that has the potential to offer you a real sense of peace of mind to secure the financial future of you and your family, critical illness insurance is certainly an interesting avenue to explore.

How to Make the Best of Inheritance Planning

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How to Make the Best of Inheritance Planning

Inheriting an unexpected, or even an anticipated, lump sum can fill you with mixed emotions – if your emotional attachment to the individual who has passed away was strong then you are likely to be grieving and the thought of how to handle your new-found wealth can be overwhelming and confusing but also exciting. One of the best pieces of advice in this situation is to give yourself some time before making any binding financial decisions. The temptation to quickly put the money to so-called ‘good use’ or to rush out and spend it can be strong but you must allow the news to sink in and also take some time to consider your options before you embark on the process of dealing with the inheritance. In the short term, put the money away in a high interest savings account and take time to research and think carefully about your financial goals and objectives and how this inheritance can help you to secure and maximise your financial future in the best way.

Although there is no one-size-fits-all approach to dealing with larger sums of money, here are some useful ideas of where to start.

Reduce your debt burden

If you have significant or high-interest debts, one of the safest options of all is paying this debt down. Not only will you achieve a guaranteed after-tax rate of return of your current interest rate, it can also add to your feeling of financial security and potentially offer you a more consistent financial picture. Debt often carries with it a significant interest rate – particularly on credit cards and overdrafts for example – so in many cases, eliminating this burden should be considered as one of your main priorities.

However, you may like to take careful note of the option below regarding investing the money instead as much depends on the prevailing interest rates and, of course, your appetite for risk, as you may well find an investment option with a potentially higher return more attractive.

Make investments

A particularly effective way of investing an inheritance is to add it to your retirement savings – especially if your nest egg is not looking quite as healthy as it should due to missed savings years for example. Those with lower or less reliable incomes should look upon this option as a great choice in particular.

Be charitable

After considering your own future financial needs, giving some of your wealth away to either charities or to family and friends is a good option to share out some of your inheritance to those who could benefit from it. What’s more, donating to charity can also offer you some tax breaks which may reduce your overall tax burden.

Many individuals see this philanthropic route as offering them the opportunity to do something meaningful and rewarding with their wealth and contributing towards their own sense of moral duty and emotional wellbeing.

Make a spending plan

Of course, you are likely to be keen to spend some of your wealth on yourself and your family, particularly if your financial situation means that you have previously had to be more careful and prudent with money than you would have liked. A great way to do this is to create a spending plan so that you can enjoy the benefits of spending, without it significantly eating into money set aside for your financial planning goals. You could, perhaps, aim to set aside 10% of the inheritance just for yourself and loved ones to enjoy. The proportion will naturally depend on your circumstances but, in principle, it’s a great idea as it allows you to balance sensible saving and investments with some short-term enjoyment of your wealth.

Talk to us, we can help.

Tax Lines to look out for

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It’s that time of year again, when many of us sit down to complete our income tax return and hope that we have done enough preparation to ensure a smooth and speedy process. Unfortunately, there are a number of complexities that can cause us problems – here are a few of the most common issues experienced by individuals when submitting their tax returns:

Medical Expenses

Expenses relating to medical expenses such as prescriptions, dentures and many more can be claimed for a non-refundable tax credit. You should also be aware that you can claim for yourself, your spouse or common law partner and any dependent children under the age of 18. You can also claim for certain other individuals whom you can clearly evidence are dependent on you (and the list of such individuals has recently been widened and can include grandparents, uncles, aunts, nieces and nephews).

Charitable Donations

You can claim tax credits for qualifying charitable donations that you made in 2017, though they are subject to an annual limit at 75% of your net income. You may also be eligible for a provisional donation tax credit. To receive such credits, you must supply a charitable donation receipt as evidence of your donation.

What’s more, there is a new formula for calculating the federal tax credit, depending on the value of donations. This is as follows:

1.    15% of the first $200 of donations

2.    33% of donations equal to the lesser of the amount of taxable income over $202,800 or the amount of donations over $200

3.    29% of total donations not included in the two stages above.

Public Transit Pass

Although this credit ended in the 2017 federal budget, it can still be claimed for the time period of January 1 – June 30, 2017. There are a range of eligible passes, including passes allowing unlimited travel within Canada, short term passes allowing unlimited travel for five days of which at least 20 days’ worth are purchased during a 28 day period and electronic payment cards.

Interest Expense and carrying charges

Interest on money borrowed to earn business or investment income is generally deductible, however interest expenses incurred on money borrowed to generate a capital gain is not tax deductible.

Carry forward information

Take note of the notice of assessment from your previous year’s tax return as it will contain important information that will apply to the submission of your current year’s return, such as your RRSP contribution limit and any carry-forward amounts.

Remember that you may be required to submit receipts alongside your electronic return at a later date, as requested by the CRA.

Child care expenses

Child care expenses include payments made to caregivers, nursery schools, day care centres and camps and other similar institutions. The deduction is usually best claimed by the lower earning spouse.

The deduction is the lesser of the following three:

·      the total qualifying child care expenses which have been incurred

·      $8,000 for each child under the age of 7, as well as $5,000 for each child between 6 and 16 and $11,000 for each child for whom the taxpayer has claimed the disability tax credit.

·      two thirds of the income earned by the individual making the claim.

If you owe money when your income tax return is complete, the only way to delay payment is to delay the filing until the April 30th deadline. Alternatively, if CRA owes you money, then file as early as possible.