As we come to the close of 2016, you may have begun to assess your year and are starting to make sense of how well you or your company has done financially. We've put together a collection of tax tips, both business and personal, that you may find useful as we head into 2017.
Tip #1: Corporate Compensation Strategy
Salary, bonuses and dividends – As we near the end of the tax year for individuals, Owner-managers should discuss compensation strategy with their accountant to tweak or change their compensation strategy for next year. This is the best time to start planning on how you can best minimize your tax bill for the next year taking into account changes that have occurred during 2016 such as, changes to the family unit, changes to your business, changes to income splitting opportunities with a spouse or adult child, and any other changes that may have occurred during the year. We can help you come up with a solution to meet the needs of you and your family, and to minimize your overall tax burden. Contact us today for an appointment.
Tip #2: Small Business Deduction and the taxable capital threshold
As a small business corporation in Ontario, the first $500,000 of active business income qualifies for a combined Federal and Provincial (Ontario) tax rate of 15%. Managing your corporate income to stay “under the bar” is often a strategy used by owner-managers to take advantage of this low rate. However, one area that can get a small business hung up is if they exceed $10M in taxable capital (retained earnings + share capital + long term debt). Over that threshold there is a grind-down of the small business deduction, and after $15 Million, the small business deduction is completely eliminated. This calculation is based on all associated companies, so be careful if you have multiple active businesses that are accumulating large amounts of taxable capital. We can help you manage a possible breach of the taxable capital threshold, but don't wait until its too late to get advice.
Tip #3: Paying Back Borrowed Funds from Your Corporation
Have you borrowed funds from your corporation? This could result in unintended tax consequences if funds are not repaid within one year of borrowing. There are few exceptions to the rule, however, you should contact us if you find yourself in this situation and need advice on how to mange your way out of it.
Tip #4: Tax-Free Employee Gifts
It’s the Christmas season – if you give gifts or bonuses to employees be careful of the tax consequences. If you prefer to give your staff a non-taxable gift, CRA’s position on tax-free status for gifts is as follows:
- Non-cash gifts and awards to arm’s-length employees will not be taxable to the employee should the gift be less than $500 annually. Anything in excess of $500 will be considered a taxable benefit. Gift-cards/certificates do not qualify as they are “near-cash”.
- In addition, a separate non-cash long-service or anniversary gift valued up to $500 can be given for a work anniversary of no less than 5 years, and cannot be given out more frequently than every 5 years. (i.e. 5/10/15/20 yr gifts would be acceptable).
- Employer-branded goods of nominal value are not included in the $500 limit. (i.e. mugs, pens, shirts, hats, etc.)
Tip #5: Start Tracking Your Business Mileage
Need a new year’s resolution? Start tracking your business mileage for one-year starting on January 1st. This is a common weakness in owner-manager record keeping. The CRA guidance on appropriate documentation for business use vehicles is that if you have documented business use for one full year, that can be deemed a base year which will reduce your administrative burden for all future years. Future years you would only need to document a three-month period to prove that the business use is consistent, upon meeting certain conditions. This method is not available for employees
Tax Tip #6: Tax Season, a Great Time to Talk About Retirement Planning
Have you been putting off speaking with your advisor about planning for retirement? Tax time may be a good time to kick-start your retirement plan. Your accountant, along with your financial planner, can help you to build a plan that will properly structure your affairs for tax minimization in your retirement years and for your estate.
Tip #7: Tradesperson Tax Deductions
Are you an employed tradesperson? If so, you may be entitled to a tax deduction of up to $500 for the cost of new tools that are required as a condition of employment. The cost of tools acquired over the threshold of $1,161 would be eligible for the credit (So spending $1,661 is optimal to maximize the credit ). So if you are planning for tool purchases, try to get over the threshold in 2016 versus deferring part of the purchases into 2017, at least up to the $1,661 maximum.
Tip #8: Teachers and Early Childhood Educators
Teachers and early childhood educators may be able to claim a 15% refundable tax credit on up to $1,000 of purchases of eligible teaching supplies in the taxation year, resulting in a tax credit of up to $150. This is a first time credit commencing in 2016!
Tax Tip #9: Your RRSP Contribution Deadline
The RRSP contribution deadline for the 2016 tax year is March 1, 2017. Make sure to make an appointment with your advisor. Your RRSP contribution room can be found on your 2015 notice of assessment, or by accessing your CRA “My Account”.
Tax Tip #10: Your TFSA as an Investment Vehicle
We are firm believers that the TFSA is the best investment vehicle for young people and those in lower tax brackets to start building a retirement nest-egg or a big ticket item such as down payment on a house. We always recommend maximizing your TFSA and RRSP, however, if you have to start with one, make it the TFSA. If you're in a higher tax bracket (say, over 40%), the RRSP argument is a bit better as for every dollar you contribute you'll get forty cents reduction in your tax bill.
If you were 18 or older in 2009, you now have access to $52,000 of contribution room in 2017. The flexibility of the TFSA allows you to withdraw funds at will, at then regain access to that contribution room...no such luck in an RRSP. This is perfect for those looking to fund that first home purchase (the RRSP withdrawal limit is only $25,000 and must be repaid over 15 years).
Consider this. If you plan to jump marginal tax brackets over the course of your career, you should be maximizing your TFSA before maximizing your RRSP (if you don't have the ability to maximize both). If you end up in a higher income bracket later on in your career, you’ll have more contribution room available that can be deducted from income earned in a higher tax-bracket, thus maximizing your deferral. In simple terms, why defer tax at a 20% tax rate, when you can do so at a 48% tax rate a few years from now.
Tax Tip #11: Maximize ROI with an RESP
If you are planning to send your children to college or university, get their savings kickstarted with an RESP. Unlike the RRSP, this is not a tax deferred savings account, however, the government matches every dollar contributed to an RESP account at 20%, up to $2,500. So maximize your child's education fund by turning $2,500 into $3,000 every year simply by contributing enough to get the full matching funds. An RESP contributed to the max since birth, and returning 5% investment returns will be worth over $75,000 on your child's 17th birthday. Not a bad return for $42,500 in contributions.
Tax Tip #12: The RRSP/RRIF tax trap
The whole "death and taxes" saying takes on a whole new meaning when we are talking about improperly managed RRSP accounts (or RRIFs). If you're smart enough to have accumulated a large amount of wealth in your RRSP account over the years, you might suddenly have a significant tax burden upon death. If you have no surviving spouse, no children under 18, or no mentally of physically infirm dependents, you will be unable to transfer your portfolio on a tax deferred basis. All of that hard earned money that you want to bequest to your children and your grandkids can get axed in half if you aren't carefully managing your withdrawals.
To put this in context, lets say you are 80 years old and have a RRIF of $1,000,000. You are taking the minimum required withdrawals each year (starting at 5% at 71 and up to 20% at 95+). You don't need more than that to live on so you're letting it continue to accumulate in the RRIF. At death, that $1,000,000 gets brought into income and you would pay tax of $500,000, leaving only half of what you intended to the beneficiaries of your estate. Now, if you carefully planned your withdrawals (say 20% per year over 5 years), you would still pay a lot of tax, but only $355,000 over 5 years, a savings of $145,000. Of course there is no telling when your last day is, but if you know you have nobody you can pass your portfolio to on a tax deferred basis, its time to start strategizing to take more than the minimum from your RRSP/RRIF and minimize that tax on death.
One additional point to consider. If you want to donate to a charity upon death, leave that amount in your RRIF account and name the charity as the beneficiary. You will not pay any tax on that bequest, thus maximizing your donation and minimizing your tax at death.
I hope that you've enjoyed these tax tips. If you have questions about how to manage your year end tax return or general accounting questions, please do not hesitate to give us a call, 705-910-6611.