Kelowna Vancouver Surrey Edmonton Calgary Regina Whitehorse Yellowknife Year End Tax Planning Issue WINTER 2017 Introduction Welcome to our 2017 tax planning issue, full of topics and opportunities that we believe you should consider as we reach the end of 2017 and look forward to 2018. This publication is not intended to be a summary of the technical provisions of the Income Tax Act and before you undertake any tax planning strategy, it is important to review it thoroughly with your Crowe MacKay tax advisor. Garrett Louie, Tax Leader, Partner Crowe MacKay LLP Missed Opportunities Mean Extra Taxes Thousands of Canadians pay more income tax than they should. By not taking full advantage of deductions, you may be one of those generous Canadians without even knowing it. Are you aware of all of the deductions that are available to you? Do you file your return on time? Do you pay tax instalments quarterly to avoid interest charges? This document outlines some of the important dates and some of the commonly-missed opportunities that could be contributing to your larger than necessary tax bill. Vancouver (604) 687-4511 Yellowknife (867) 920-4404 In this issue 1 Introduction 2 Missed Opportunities Mean Extra Taxes 3 How To Impact Your Tax Bill 4 What s New for 2017 5 Key Dates 6 Major changes coming for 2018 Surrey (604) 591-6181 Edmonton (780) 420-0626 Kelowna (250) 763-5021 Regina (306) 347-2244 Calgary (403) 294-9292 Whitehorse (867) 667-7651
Expenses you may be entitled to deduct: EMPLOYMENT EXPENSES Employees who are required to use their own automobiles for work (other than for travelling to and from their work place) without reimbursement from their employer can deduct the business portion of their automotive expenses. you are reimbursed and the amount of the reimbursement is not reasonable, you can still claim a deduction for the non-reimbursed portion. In order to claim employment expenses, your employer will have to provide you with a completed form T2200 Declaration of Conditions of Employment. CARRYING CHARGES AND DEDUCTIBLE INTEREST Borrowed funds must generally be used for the purpose of earning income (e.g. investing) in order for the related interest to be deductible. Maintaining proper documentation of loans and interest payments will help support claims for interest deductions. Deductible carrying charges may include investment counsel fees, bank fees or similar charges. CHILDCARE EXPENSES Subject to certain limitations, childcare expenses may be deducted from income by the lower income spouse. These expenses include daycare, babysitting, boarding school and day camps. Note that you will have to provide the Social Insurance Number of any individual you paid for childcare and supporting documentation is frequently requested by Canada Revenue Agency (CRA). If MOVING EXPENSES If you moved during the year to be at least 40 kilometres closer to a new job, to run a business or to attend a post-secondary educational institution full-time, then you may be able to deduct certain moving expenses. The amount you can deduct is limited to the amount you earn at the new location in the year. Unused deductions can be carried forward and deducted against the related income in a subsequent year. Some examples of allowable moving expenses are: Accommodation, meals and temporary living expenses near your new or old residence Cost of changing your address on legal documents Cost of replacing your driver s license Cost of cancelling the lease for your old residence or expenses for selling your old residence such as real estate commissions and advertising Cost to maintain your old residence when vacant (maximum of $5,000) Certain expenses related to purchasing your new residence Transportation and storage for household effects Travelling from your old residence to your new residence Utility hook-ups and disconnections, etc Proper documentation of your expenses, including receipts, is critical as the CRA generally requests support for moving expenses. Tax credits you might be eligible to claim CHARITABLE DONATIONS Charitable donations made by you or your spouse during the year should normally be added together and claimed on the income tax return of one spouse. A higher credit is available for donations over $200, so it makes more sense to combine the donations and claim them on one return. If your total donations are less than $200 there is no advantage to claiming them on one return. The key to supporting your claim is to keep the official tax receipts. If you are donating certain publicly-listed securities, your donation credit is based on the fair market value of those securities. Furthermore, you will not pay tax on any accrued capital gains on the donated securities. Donations can also be carried forward up to five years so if you find a donation receipt that was not previously claimed, bring it in to review with your Crowe MacKay tax advisor. MEDICAL EXPENSES You may claim a non refundable tax credit on medical expenses for yourself, your spouse and dependent children. While either spouse can make the claim, as with charitable donations, medical expenses should usually be added together and claimed on the income tax return of one spouse (usually the lower income spouse) in order to maximize tax savings. You are not restricted to claiming on a calendar year basis as you can claim medical expenses for any 12 month period that ends in the year. The most commonly missed expenses are dental bills, eye glasses, private medical insurance (including certain travel medical insurance premiums) and certain travel costs such as travel to regional or provincial centres for treatment. 2
ATTENDANT CARE AND NURSING HOME EXPENSES For persons who qualify for the disability amount, attendant care expenses may be claimed for: part-time or full-time attendant care in a self-contained domestic establishment (the person's home, for instance) full-time attendant care in a nursing home attendant care in retirement homes, homes for seniors, or other institutions Attendant care expenses can be claimed as medical expenses to a maximum of $10,000 per year if the disability tax credit is claimed. However there is no maximum amount if the disability tax credit is not claimed. When the expenses are for full-time care in a nursing home, there is no limit on the total attendant care expense that can be claimed as medical expenses. However, the disability tax credit can not be claimed. Once a person with a disability has applied for and is deemed eligible for the disability tax credit, he/she may also be eligible to participate in a Registered Disability Savings Plan, which will be discussed later in this newsletter. Other credits may be available to those supporting certain family members who are dependent on them due to a physical or mental infirmity: Amount for infirm dependents age 18 or older Attendant care and nursing home expenses Canada Caregiver amount TEACHER AND EARLY CHILDHOOD EDUCATOR SCHOOL SUPPLY TAX CREDIT The Teacher and Early Childhood Educator School Supply tax credit is a refundable tax credit. This credit will allow an employee who is a teacher or early childhood educator to claim a 15% refundable tax credit on up to $1,000 of purchases of eligible teaching supplies during the year. HOME ACCESSIBILITY TAX CREDIT The Home Accessibility tax credit is available for seniors (age 65 and older) and individuals who qualify for the disability tax credit. This credit allows these individuals to claim a tax credit on up to $10,000 of expenses incurred to perform a qualifying renovation on their home. Such a renovation must allow the individual to gain access to, or be mobile or function within the home, or reduce the risk of harm to the individual within or gaining access to the home. TRANSIT PASSES Amounts paid for monthly transit passes and for certain weekly passes for you, your spouse or common-law partner and children may qualify for a tax credit. 2017 is the final year for which this credit can be claimed as the 2017 Federal Budget proposed to eliminate this tax credit for amounts paid for eligible transit passes after June 2017. DISABILITY TAX CREDIT This credit is available to a person with a severe and prolonged impairment in physical or mental function, subject to certain criteria. To qualify, CRA must approve an application signed by your doctor or nurse practitioner. Areas that may apply include the following: Vision/blindness Life-sustaining therapy Impairment to speech Impairment to hearing Impairment to walking Impairment to elimination (bowel or bladder functions) Impairment to feeding Impairment to dressing Impairment to performing the mental functions necessary for everyday life STUDENT LOAN INTEREST Interest paid on student loans obtained under the Canada Student Loans Act, the Canada Student Financial Assistance Act or similar provincial or territorial government legislation for postsecondary education can be claimed as a tax credit. If you do not use the credit for the year in which the interest is paid, the unused amount can be carried-forward for up to five years. HOME BUYERS AMOUNT If you are a first time home buyer, you may be eligible to claim a tax credit of $5,000. Generally speaking, you may be considered a first time home buyer if neither you nor your spouse or common-law partner owned and lived in another home anywhere in Canada in the calendar year of the purchase or in any of the four preceding calendar years. What to do next? FILING ON TIME The normal deadline for filing an income tax return for the previous year is April 30th. This filing deadline is extended to June 15th if you or your spouse are self-employed. However, income taxes payable are still due on April 30th. Similarly, the information return for Specified Foreign Property having an aggregate cost over $100,000 CAD at any time during the year (Form T1135) must be filed by the individual s filing deadline. Taxpayers who do not file their income tax returns on time face significant late-filing penalties: 5% of the balance due plus 1% per month to a maximum of 12 months for the first offence, plus applicable interest on the penalty. The penalty can more than double where the taxpayer fails to file on time for a second time in three years and if a formal demand for filing has been issued by the Minister. Interest and penalties are not tax deductible and add up quickly at the rates charged by CRA. Even if you cannot pay the amount of taxes due, ensure that you file on time. 3
PENALTIES FOR FAILING TO REPORT INCOME If you have income from several sources, make sure that you do not miss reporting any of it. By failing to report income on your return in the current year and in any of the three preceding years, you could be subject to federal and provincial/territorial penalties based on a percentage of the unreported income or the understated tax liability on the unreported income. We recommend that you ensure that you have information on all of your income when having your return prepared. TAX INSTALMENTS Failure to pay quarterly income tax instalments when required may result in interest charges. It is possible to make catch-up payments and reduce or offset the interest charges. Contact your Crowe MacKay tax advisor if you are unsure if you are required to make tax instalments. How to impact your 2017 tax bill ACCOUNTING FEES AND LEGAL FEES Certain accounting or legal fees such as the cost of representation on tax disputes are deductible in the year paid. If you have these costs be sure to pay them before the end of the year. CHARITABLE OR POLITICAL DONATIONS If you are planning to give money to a charity or political party, make sure the gift is made before December 31, 2017 to ensure you can claim the tax credit on your 2017 return. EQUIPMENT PURCHASES If you have equipment you are planning to purchase for your business early next year, consider purchasing it before December 31, 2017 or before your corporate year end as applicable. The tax depreciation only starts when the equipment is available for use in your business. FAMILY TRUST Ensure that any desired distributions to or from a family trust are made by December 31, 2017. If distributions are planned, ensure appropriate dividends are paid through the Trust by year end. Payments by cheques deposited and distributed before the end of the year are required, unless detailed steps are completed. The Department of Finance has proposed new tax rules effective as of 2018 that may significantly impact certain tax benefits associated with using family trusts. These new rules will be discussed later in this newsletter. Please contact your Crowe MacKay tax advisory for more details on how these new rules may affect you. HOME OFFICE If you are a self-employed individual using a home office as your principal place of business (more than 50%), or exclusively for earning business income and on a regular and continuous basis for meeting clients or customers, then you may be able to deduct home expenses related to the office space. Such expenses include the business portion of rent, mortgage interest, property taxes, utilities, insurance, repairs, and telecommunications. INVESTMENTS If you have realized capital gains in the current year, consider selling investments with unrealized capital losses before year end. This strategy will reduce your tax bill as capital losses can be offset against capital gains. The key is to trigger these losses in 2017 so the last settlement day for 2017 must be considered. Where a loss has been triggered, you or an affiliated party cannot reacquire the same or an identical investment within 30 days of the sale or the loss will be disallowed. We recommend that you consult your Crowe MacKay tax advisor and your investment advisor prior to undertaking this strategy. OLD AGE SECURITY (OAS) CLAW BACK If your net income in 2017 is over $74,788, you are required to repay some or all of your OAS benefits. This claw back is the lesser of your OAS benefits received in the year and 15% of your net income that is over $74,788. The OAS claw back is calculated solely on your net income and is not affected by your spouse s income. Note that if your net income is $121,314 or greater in 2017 (and you are not receiving an increased OAS entitlement see below), you will be required to repay all of your OAS benefits. If you are eligible to receive OAS but are subject to a full claw back, you may consider deferring receiving OAS until a year in which the claw back is reduced or eliminated. Deferring the receipt of OAS will increase your OAS entitlement when you begin to collect it and it will increase your maximum annual net income to receive OAS. Contact your Crowe MacKay tax advisor if you have any questions about OAS. PENSION INCOME-SPLITTING If you are earning eligible pension income (excluding Canada Pension Plan, Old Age Security and certain foreign pension income), you may be able to split up to 50% of this income with your spouse or common-law partner. This pension income-splitting may be done by filing a joint election with your income tax return and can result in significant tax savings if your spouse or common-law partner is in a lower tax bracket. Your spouse or common-law partner may also be able to claim the pension income amount tax credit on the income that he/she is deemed to have received (see below). PENSION TAX CREDIT A $2,000 pension tax credit is available if you earn eligible pension income, which typically includes income from a registered pension plan, income from a registered retirement income fund (RRIF) and annuity payments from an RRSP. If you are 65 years or older and are not receiving any pension income, you may consider converting a portion of your RRSP to a RRIF in order to receive eligible pension income on which the pension tax credit can be claimed. REGISTERED DISABILITY SAVINGS PLAN (RDSP) The RDSP is a registered long-term savings plan specific to people with disabilities who are eligible for the disability tax credit. Contributions may be made by the beneficiary, a family member, or by any other authorized contributor. There is no annual limit on contributions; however, there is a lifetime contribution limit of $200,000. Although contributions to the plan are not taxdeductible, income earned inside the plan is not taxed until it is withdrawn by the beneficiary. Contributions can be made until the end of the year in which the beneficiary turns 59 and payments from the RDSP must begin by the end of the year in which the beneficiary turns 60. There are currently two income-based programs in place to enhance the funds that are contributed 4
to the RDSP. The Canada Disability Savings Grant Program, and the Canada Disability Savings Bond Program The rules related to RDSPs can be complex and we recommend you speak with your Crowe MacKay Tax advisor if you believe this program may be right for you or a family member. REGISTERED EDUCATION SAVINGS PLANS (RESP) Make any contributions to an RESP before December 31 to qualify for any 2017 grants you may be eligible for. As in years past, the government will pay a Canada Education Savings Grant of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum of $500 in respect of each beneficiary. Additional grants are possible where there is unused grant room from a previous year and for families with lower net income. Canada Education Savings Grants have a lifetime maximum of $7,200. REGISTERED RETIREMENT SAVINGS PLAN (RRSP) Regular and spousal contributions for the 2017 taxation year may be made up to March 1, 2018. Similarly, if you must repay a portion of your Home Buyers Plan or your Lifelong Learning Plan, payments must be made by that same date. Overall tax savings are most significant for individuals who are currently in a high tax bracket but will be in a lower bracket when the RRSP money is withdrawn. We suggest that you contact your Crowe MacKay tax advisor if you have any questions about RRSPs. The RRSP contribution limit for 2017 is $26,010. loans (with interest as low as 1%) are typically used for income-splitting where families have large investment pools (generally over $1M). TAX FREE SAVING ACCOUNT (TFSA) Canadian residents age 18 and over are eligible to open a TFSA. Income earned in a TFSA is not taxable as it is earned nor is it taxable when withdrawn from the account. Contributions to a TFSA are not tax deductible. For 2017, the maximum contribution is $5,500 plus any outstanding contribution room carried forward. The cumulative contribution room granted to Canadians since the start of the TFSA program is $52,000 to December 31, 2017. Please refer to your 2016 Notice of Assessment and/or your investment advisor for the maximum contribution you may make for 2017. TAXABLE BENEFITS Auto benefit - If you drive an automobile that is owned or leased by your employer, you may be subject to a taxable benefit for your personal use of the automobile. You may reduce this taxable benefit by reimbursing your employer for the amount paid for your personal use of the automobile. The deadline for the reimbursement is February 14, 2018. Interest benefit if your employer provided you with an interest-free loan or a loan at an interest rate that is lower than CRA s prescribed rate (excluding a home relocation loan), you may be subject to a taxable benefit. You may reduce this taxable benefit by paying the interest to your employer at the prescribed interest rate (currently 1%). The deadline for this interest payment is January 30, 2018. What s new for 2017 CAPITAL GAINS EXEMPTION For 2017, the capital gains exemption for qualified small business corporation shares has risen from $824,177 to $835,714. This exemption will be indexed for inflation in subsequent years. The capital gains exemption for qualified farm or fishing property remains at $1,000,000. Charitable donations The first time donor super credit on up to $1,000 of donations will be available again in 2017. This increased tax credit adds 25% to the current credit and only applies to cash donations; donations in kind are not eligible. This credit is only available to individuals if neither the individual nor the individual s spouse has claimed a donation tax credit in the preceding five tax years. The first time donor super credit will be eliminated after 2017. CANADA CAREGIVER CREDIT The 2017 Federal Budget proposed the consolidation of the three existing caregiver credits, the Family Caregiver Credit, the Infirm Dependant Credit and the Caregiver Credit, into the Canada Caregiver Credit. This credit is effective as of 2017 and is available in respect of an individual s spouse or common-law partner, minor child, or eligible relative who is dependent on the individual because of mental or physical infirmity at any time of the year. SHAREHOLDER LOANS If you have a shareholder loan from your company that has been outstanding since the December 31, 2016 year end (i.e. it is at risk of showing up as a debit balance on two consecutive balance sheets), ensure it is repaid by December 31, 2017 or earlier. Consult your Crowe MacKay tax advisor to determine if the amount must be repaid and to discuss repayment methods such as dividends or net wage compensation. SPOUSAL LOANS If you have spousal loans, ensure the interest is paid by January 30, 2018 by a documented method such as a deposited cheque. These INSIGHTS 5
Too many deadlines? No problem, we put together a list of key dates to help you navigate the 2017 tax year. Important key dates to keep in mind: DECEMBER 15, 2017 Final personal tax instalment for 2017 if you are required to pay instalments DECEMBER 31, 2017 Charitable gifts Political contributions Certain spousal and child support payments Deductible legal fees Interest on student loans Investment counsel fees, interest and other investment expenses Medical expenses Union and professional membership dues JANUARY 30, 2018 Interest on a low interest or non-interest bearing loan from your employer to reduce your taxable benefit Interest on intra-family loans FEBRUARY 14, 2018 Reimbursement of automobile expenses to your employer to reduce your taxable benefit if you use an employer-provided automobile MARCH 1, 2018 Contribution to your own RRSP or spousal RRSP for the 2017 tax year Repayments under a Home Buyer s Plan or a Lifelong Learning Plan for the 2017 tax year APRIL 30, 2018 Personal income tax filing deadline for individuals who do not earn self-employment income. Tax balance due date for all individuals. JUNE 15, 2018 Personal income tax filing deadline for individuals who earn self-employment income 6
2018 Major changes coming in 2018 Several proposed tax changes were announced on July 18, 2017, that will have a significant impact on tax planning for private corporations and their shareholders. The proposed tax changes that were announced are summarized below: Income splitting. This refers to the transfer of income between family members to effect a lower overall tax rate compared to if the income was earned directly by one family member (who would typically be in a higher tax bracket). On October 16, the Government stated that it still plans on implementing these rules effective January 1, 2018, albeit in simplified form to reduce the overall compliance burden. Passive investment income. The Government has indicated that it is concerned about the deferral of tax that is achieved by having income taxed inside a private corporation at low business income tax rates and invested to generate passive investment income. On October 18, the Government stated that the draft legislation for these new rules should be released as part of its 2018 Federal Budget and that it would consider including an annual $50,000 passive income threshold and transitional relief as part of these proposed tax changes. Conversion of income into capital gains. The Government initially proposed new rules that would limit the ability to convert income that would normally be paid as salary or dividends into capital gains. On October 19, the government acknowledged several unintended consequences associated with these proposed rules and announced that it will not be moving forward with them. Please refer to our previous blog posts (https://crowemackay.ca/uncategorized/update-tax-planning-private-corporationsshareholders/ and https://crowemackay.ca/blog/taxation-private-corporations-recent-developments/) for more information on these proposed tax changes. These proposed changes will have a significant impact on private corporations and their shareholders, and there may be tax planning opportunities for you to consider by the end of this year in order to minimize any adverse tax implications associated with them. Please contact your Crowe MacKay tax advisor for further details. 7