Accounting for Law

Year-end brings key opportunities for tax planning

The end of the year brings a number of opportunities to reduce your 2015 taxes — and many taxpayers may already be engaging in tax planning without realizing it, Toronto tax litigation lawyer David J. Rotfleisch writes on

For individuals, RRSPs are a key tool for tax planning, says Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation.

“An RRSP allows a taxpayer to receive a deduction for the amount contributed, while also allowing the capital to accumulate tax free until retirement. Even though the deadline is February 29, 2016, taxpayers should contribute to their RRSPs as soon as possible because the longer the amounts have to increase in value, the more compounded growth,” he explains.

Many taxpayers manage their own RRSP through discount brokerage accounts and other similar products, says Rotfleisch, but not all are aware that not every type of investment is permitted for RRSP investing purposes.

“Non-qualifying investments are taxed at 50 per cent of the value of the investment when placed into an RRSP. Taxpayers can claim a credit on this onerous tax providing they dispose of the offside investments within the taxation year that they are purchased.”

Opening a tax-free savings account (TFSA) can also be used to generate large tax savings, as the accrued capital gains, interest and dividends earned in the account are not subject to income tax when earned or when withdrawn.

Rotfleisch also suggests using family members to expand your TFSA limit.

“Normally, when a taxpayer gifts a spouse or child shares or other investment, attribution rules in the Income Tax Act apply, meaning that any income earned on the gifted shares accrues to the parents personally. However, because income earned inside a TFSA is free of tax, taxpayers can gift shares and other investments to family member's TFSA account without having the income attribute back to them.”

When it comes to tax tips for charitable deductions, Rotfleisch recommends taxpayers review their anticipated donations for the first quarter of 2016, and consider donating before the end of 2015.

Taxpayers can also validly donate shares of publicly traded corporations to charity and still reap the tax benefits, he suggests.

For first-time donors, new rules in the Income Tax Act offer an additional 25 per cent of credit for charitable donations made by a taxpayer who has never claimed a charitable donation in the past. This "super credit" is only available for the taxation years 2013-2017, Rotfleisch explains.

In terms of employment-related tax planning strategies, Rotfleisch says there are certain exceptions to the general rule that expenses incurred by a taxpayer with respect to their employment are not deductible.

“While the Income Tax Act does not generally allow for the depreciation of employment related capital property, employees are entitled to write off depreciation on cars, planes and musical instruments. Taxpayers planning on purchasing one of these products should do it late in the year to enjoy the benefit of accelerated capital cost allowance claims,” says Rotfleisch.

“Similarly, tradespersons and apprentices are permitted to deduct the cost of their tools up to a prescribed limit. Qualifying individuals should consider doing this before the yearend to maximize deductions.”

Employers can also give non-taxable gifts of up to $500 annually and non-cash long-service and anniversary awards to arm's length employees that can still be deducted as business expenses.

There are also many opportunities for tax planning around investments outside of the RRSP and TFSA, Rotfleisch says.

“Taxpayers who have incurred capital losses in the year can utilize them to reduce capital gains for the current year and they may be carried back to offset capital gains from previous years and allow the taxpayer to receive a refund of previously paid taxes. If you own capital property that has gone down in value, consider disposing of it in order to shelter any possible gains that you've made in 2015.”

Taxpayers who own shares of a qualified small business can make use of a lifetime capital gains exemption of up to $800,000. Taxpayers who have shares that have accumulated in a small business should consider disposing of them to a spouse or corporation they control in order to reap the tax advantage of the capital gains exemption.

And for those carrying on a business, either personally or through a corporation, the opportunities for planning to reduce overall tax liabilities multiply, says Rotfleisch.

“If a taxpayer has an allowable business investment loss (ABIL), a loss on shares or a debt with a small business owned, it can be utilized to reduce overall taxable income. In order to claim an ABIL, ensure that shares have been sold or clearly establish the write-off of a bad debt that is regarded reasonably as being uncollectible.”

Also, Canadian Controlled Private Corporations (CCPCs) with active income of less than $500,000 can use the small business tax deduction.

Other strategies involve paying reasonable salaries to family members who work for the business, optimizing your compensation strategy, and accelerating expenses to make purchases that can be deducted this year rather than waiting for the new year, says Rotfleisch.

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