Year-end tax planning tips
By: Michelle Connolly,
In addition to helping them with financial planning and investment solutions, clients often reach out to their advisors for guidance on filing their personal tax returns, what personal tax credits they are eligible for and their allowable tax deductions. With a few weeks left in 2016, you and your individual clients can still take some proactive tax planning steps for both 2016 and years to come. Here are some points to consider:
Important dates for the 2016 tax year
- December 23, 2016 The last day for trading (T-3) to report a disposition for 2016 tax purposes
- December 31, 2016 2016 TFSA contribution deadline and the last day that 2016 receipts can be issued (? Date used on receipt) for medical expenses, charitable donations and interest paid on deductible loans
- January 30, 2017 The last day by which interest relating to a prescribed loan outstanding in 2016 must be paid
- February 28, 2017 T5 filing deadline (CI Corporate Class) for 2016 slips
- March 1, 2017 2016 RRSP contribution deadline
- March 31, 2017 T3 filing deadline (CI Trust pools and First Asset ETFs) for 2016 slips
- May 1, 2017 Personal Tax Return (T1) filing deadline for regular returns, as April 30 falls on a Sunday
- June 15, 2017 T1 filing deadline if a client (or their spouse) has self-employed income. Note that June 15 is the return filing deadline, and any anticipated income tax balance owing is due May 1, 2017.
Clients should be organized and review their last three years' worth of T1s and Notices of Assessment("NofA") for relevant tax credit carry-forward information and other tax balances.
Advisors and clients should also review existing investment accounts and identify:
- What has changed during 2016 - have any accounts been closed, or new accounts opened? Has there been a change in client circumstances?
- Does the client have open, non-registered, TFSA, RRSP/RRIF/LIRA, RESP or RDSP accounts? If not, should they consider opening an appropriate account before the end of 2016, or plan to do so in 2017? Are clients aware of how the various Canadian investment accounts provide flexibility and control over generating income - both in nature and amount - access to cash flow, and their marginal tax rate?
Once all the client's accounts have been identified, a list of income slips, a summary of 2016 capital transactions, any interest paid, investment counsel fees that are deductible pursuant to S.20(1)(bb), or other reporting slips that are anticipated for each account should be compiled to avoid the omission of relevant tax information. Advisors and clients should be aware of CRA's recent initiatives to implement "Repeated failure to report income" penalties and interest for such omissions.
Calculate 2016 income and combined marginal tax rate
Where possible, clients should identify all 2016 income sources and estimate their 2016 earnings to consider whether triggering additional income is prudent, or if capital losses should be crystallized to reduce capital gains reported.
For clients who are in lower income brackets and have room remaining in their respective tax bracket, does it make sense to trigger additional income such as capital gains to increase their tax-adjusted cost basis ("ACB"), or to withdraw additional funds from their RRIF on a cheap tax basis to save tax in future years? The after-tax dollars can be re-invested in their TFSA or an open, non-registered account.
Where clients can defer income and the resulting tax liability to future years, they should do so if such income will be taxed at the same tax rate or lower. However, because Canada, its provinces and territories employ marginal tax rate systems, deferring income and then having it taxed all at once, say on an individual's terminal (final) tax return, or less frequent transactions at larger dollar amounts, can sometimes result in a significantly higher marginal tax rate and tax liability generated.
Clients who are interested in proactively triggering income should be mindful of income thresholds and the impact they may have on claiming certain personal tax credits or on receiving federal pensions or benefits such as Old Age Security. For example, in 2016, Canadian retirees receiving OAS who report taxable income in excess of $73,756 will have their OAS clawed back at a rate of 15%, and in its entirety when their income exceeds $119,512.
Where an advisor is aware that a client has triggered substantial capital gains in the current year, received capital gain dividends, or reported taxable capital gains in the previous three years, is there a possibility the client has unrealized capital losses that should be triggered? If so, such realized capital losses will first be applied against current year capital gains or capital gain dividends, and will reduce the client's income tax liability. Any capital losses remaining can then be applied to taxable capital gains reported in previous years to generate an income tax refund.
Clients who are contemplating triggering capital losses should be mindful if any of the capital gains qualify for the lifetime capital gains exemption and the application of the superficial loss rules. They should also know who is considered an affiliated person for purposes of the superficial loss rules.
TFSA and RRSP contributions
- 2016 Annual TFSA Contribution is $5,500, or $46,500 if no previous contributions have been made
- 2016 Annual RRSP Deduction limit is the lesser of 18% of 2015's earned income or $25,370, plus 2015's unused RRSP deduction limit carried forward.
Clients often ask, "I have $4,000 - should I contribute to my TFSA or my RRSP?" Here are some comparative aspects advisors and clients should consider when debating a TFSA versus RRSP contribution:
|Meets all savings and investment objectives||Primarily used for retirement savings|
|Contributions made with after-tax dollars||Contributions are tax deductible|
|Withdrawn amounts are added to contribution room the following year||When funds are withdrawn, contribution room is lost permanently|
|Withdrawals are tax free cash flow||Withdrawals are regular income receipts|
|No requirement to withdraw||Must be converted to RRIF by age 71, minimum withdrawals mandated each year thereafter|
|Anyone 18 and older can contribute||Contributions based upon earned income reported and cease at age 71|
Income splitting and transfer of personal tax credits
There are a number of income-splitting strategies that can be useful for tax planning purposes. Income splitting allows higher income earners to move assets and income to lower income earning family members, thereby generating a lower tax liability collectively than if the assets and income were taxed in the higher income earner's hands alone.
Examples of income splitting strategies are prescribed rate loans (currently the prescribed rate is 1%), effective use of in trust for (ITF) accounts, eligible pension income splitting, and CPP pension sharing.
In addition to income splitting, individuals who have not fully utilized their non-refundable personal tax credits can transfer them to their spouse or common-law partner to reduce their respective income taxes otherwise owing. These credits include the age amount, the family caregiver amount for children under the age of 18, pension income amount, disability amount (self), and tuition, education and textbook amounts.
What has changed in 2016?
Gone are the Family Tax Cut and Canada Child Tax Benefit. The Canada Child Benefit ("CCB"), a non-taxable receipt calculated based on the number of children in the family and the family net income was introduced in July, 2016.
Also new is an administrative change to the reporting of the disposition of property where the principal residence exemption ("PRE") was claimed. Previously, CRA did not mandate the reporting of such dispositions where the property was your principal residence for every year it was owned.
Eligibility for OAS and the Guaranteed Income Supplement ("GIS") has been reinstated to age 65 (from 67). There are also improved benefits to GIS for senior couples that have to live apart for reasons beyond their control. Final changes to the CPP actuarial factors for when the CPP retirement benefit is triggered early (between 60 and 65 years of age), and late (after age 65), have been implemented.
The above 2016 tax information is not meant to be exhaustive, but can be used to prompt dialogue and discussion with clients, particularly as 2016 draws to a close and tax season approaches. For further information on these topics, please do not hesitate to reach out to your CI Sales Team to put you in touch with a member of CI's Tax, Retirement and Estate Planning (TREP) team, or visit the TREP website at www.trep.ci.com.
Good luck with the 2016 personal tax season and stay tuned for TREP's personal tax checklist in early 2017.
Michelle Connolly, CPA, CA, CFP and TEP, is Vice-President Tax, Retirement and Estate Planning at CI Investments Inc.
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