Year-end tax planner: looking back at 2017 and forward to 2018

Federal highlights

Disability Tax Credit – As of March 22, 2017, nurse practitioners have been added to the list of medical practitioners who can certify eligibility for the disability tax credit.

Medical Expense Tax Credit – Certain costs related to the use of reproductive technologies now qualify for the medical expense tax credit for 2017 and onwards.

New Canada Caregiver Credit – This credit replaces the existing caregiver credit, the infirm dependent credit and the family caregiver tax credit. The new Canada caregiver credit amount is $6,883 or $2,150 depending on your situation.

Tuition Tax Credit – Starting with the 2017 taxation year, tuition fees that pay for occupational skills courses at post-secondary educational institutions in Canada that are not considered post-secondary school level can be eligible for the tuition tax credit.

Public Transit Tax Credit – Effective July 1, 2017, the credit is no longer available.

Home Relocation Loans Deduction – Starting in 2018, the deduction available for eligible home relocation loans will no longer be available. Therefore, the full amount of the interest differential (from the prescribed rate to the actual rate) is taxable.

Provincial highlights
Small business rate and thresholds

Ontario’s small business rate will be reduced to 3.5% from 4.5% effective January 1, 2018.

Personal income tax
The Ontario non-eligible dividend personal tax rate has increased as a result to the Federal and Ontario small business tax rate changes for 2018. The top marginal personal tax rate will be 46.8% as of January 1, 2018 and 47.4% as of January 1, 2019.

Entrepreneurs
Dividends or salaries – An owner-manager must determine the most tax effective salary-dividend mix that minimizes overall taxes for the corporation and all relevant individuals. The owner-manager must consider personal marginal tax rates, the impact of alternative minimum tax (AMT), the corporation’s tax rate, RRSP contribution room ($144,500 of earned income in 2016 is required to maximize RRSP contribution in 2017), provincial health and/or payroll taxes, Canada Pension Plan (CPP) contributions and other personal deductions and credits which may be available:
* If personal cash requirements are low, consider retaining income in the corporation to obtain the tax deferral, as corporate rates are lower than personal rates.
* Be aware that distributing dividends that trigger a refund of refundable tax on hand does not necessarily provide a tax benefit to the shareholder if the shareholder is subject to personal dividend tax at a rate exceeding the corporate dividend refund rate of 38.33%

Personal services business – The federal corporate tax rate for personal services business is 33%. Therefore, consideration should be given to whether it is beneficial to carry on business through this type of vehicle.

Tax liabilities – Final corporate tax liabilities need to be paid within two months after year-end and within three months for certain eligible Canadian Controlled Private Corporations (CCPCs).

Income to family members – Consider paying salaries to family members who work in the business. Keep in mind the salaries must be reasonable or the amounts may be challenged by the CRA. Salary payments as opposed to dividends also allow the recipient to have earned income for child-care expenses, CPP and RRSP purposes.

Depreciable assets – Consider purchasing equipment prior to the end of your fiscal year, in order to accelerate access to capital cost allowance (CCA). Be aware of the available for use rules. In addition, a special election can be used to treat leased fixed assets as purchases under a financing arrangement.

Business income reserve – When proceeds from the sale of goods or real property – classified as inventory – are not due until after the year-end, a reserve on sale profits may be claimed over a maximum of three years.

Capital gains reserve – A capital gains reserve may be claimed on the sale of capital properties, over a maximum of five years, if the proceeds of disposition are not due until after the year-end.

Ride-sharing services – The 2017 federal budget proposes to amend the definition of a “taxi business” in the Excise Tax Act (ETA) effective July 1, 2017, to ensure that ride-sharing services (such as Uber) share the same GST/HST consequences as taxi services. The proposed amendments would require all Uber drivers to register for GST/HST purposes and to charge GST/HST on their fares.

Corporate tax changes
Small business rate – The current rate of 10.5% is proposed to be reduced to 10% effective January 1, 2018 and to 9% effective January 1, 2019. The bill regarding this measure has yet to be drafted and therefore has yet to receive Royal Assent.

Billed-basis accounting – Draft legislation proposes to remove the election to exclude work-in-progress (WIP) from taxable income for certain professionals. The draft legislation also proposes to have a 5-year transitional plan to reduce the burden of the elimination. Once the draft proposals are approved, the changes will apply for taxation years beginning after March 22, 2017.

Tax proposal changes for private corporations
1. Income splitting
Taxpayers that are currently income splitting with family members will have until the end of December 31, 2017 to access the graduated rates on split income. Although revisions to the draft legislation have yet to be released, impacted individuals are encouraged to review their situation with their tax advisor to determine if payments should be increased before the end of the year, as the new income splitting rules (TOSI) take effect on January 1, 2018. Payments before the end of the year should only be made to individuals 18 years old or older to avoid paying tax at the highest marginal tax rate on such amounts. Beginning January 1, 2018 any payments made to a spouse or children, regardless of age, will be subject to tax on the highest marginal rate unless certain criteria are met with respect to their contributions to the business.

The current guidance we have from the Department of Finance indicates that continued access to the graduated rates on income received by a related individual must be reasonable vis-à-vis the contribution the individual makes to the company be it financial or participatory. There is no formal guidance on determination of what may be considered a reasonable return on an individual’s financial or participatory contribution to a business and taxpayers will be challenged to make this assessment given the various inputs that have to be considered in the determination. These measures will impact, among other parties, professional firms, their current trust and other tax structures.

1. Passive Investments
On October 18, 2017, the Department of Finance announced that they are moving forward with measures to limit the deferral of the tax benefits of passive investments within a private corporation through additional tax on passive income in excess of an annual threshold. The Department of Finance has determined that an annual passive income threshold of $50,000 per year (based on $1,000,000 of passive investments and an assumed return of 5%) in a private corporation will provide sufficient savings for business purposes (funding for contingencies and future investments) and personal savings (funding for sick leave, parental leave and retirement).

The Department of Finance has confirmed that the additional taxes will apply on a go-forward basis, thus ensuring future income from current passive investments will not be subject to the new passive investment regime. The Department of Finance stated that it is examining the key design aspects of the passive investment rules to consider circumstances in which the new rules should not apply. (This could include capital gains realized on the sale of shares of a corporation engaged in an active business and income from AgriInvest, a self-managed producer-government savings account.) Details of how these rules will operate along with draft legislation will be released with the 2018 Budget.

Eligible capital property rules – Effective January 1, 2017, the eligible capital property (ECP) regime has been eliminated and replaced with the new CCA class 14.1:
* Transitional rules allow for a CEC deduction of 7% of the pool of expenditures incurred before January 1, 2017.
* The first $3,000 of incorporation costs will be a fully deductible expenditure.
* Gains from the disposition of ECP on or after January 1, 2017 will be taxed at investment income tax rates, rather than active business income tax rates.

Personal tax matters
I am an employee, so what do I need to know?

Employment-related courses – Consider having your employer pay directly for job-related educational courses.

Gifts and awards – Subject to certain exceptions, non-cash gifts and non-cash awards with a total value of $500 or less annually may not be taxable to you personally. Ask your employer to consider this option.

Employee loans – Pay 2017 interest on or before January 30, 2018 to reduce your taxable benefit on employee loans.

Home office – Ensure you claim your entitlement to home office expenses if your employer will complete form T2200.

Public transit pass tax credit – Ensure you claim the cost of public transit, subject to certain criteria and retain passes or receipts to support claims. Note that the federal credit no longer applies as of July 1, 2017.

Corporate vehicle – Reduce your operating cost benefit and/or standby charge benefit if you have access to a company vehicle.
To reduce the operating cost benefit:
* Consider reimbursing your employer for some or all of the personal use portion of the actual operating costs by February 14, 2018; and
* Reduce your personal driving to less than 50% of the total driving, if possible.
To reduce or eliminate your standby charge benefit:
* Limit your access to the vehicle (i.e. not every day); and
* Avoid personal driving.

Employee stock options – public companies
* If you dispose of stock options for cash, discuss with your employer as to whether they can elect to forgo the tax deduction so you may claim it.
* Employers are now required to withhold and remit income tax relating to the taxable benefit realized when public company options are exercised.

I have investments, so what do I need to know?

Tax-Free Savings Account (TFSA)
* The eligible contribution amount for a TFSA is $5,500.
* Canadian residents age 18 or older may contribute to a TFSA. Contributions are not deductible but withdrawals and income earned are not taxed.
* Withdrawals should be done before year-end as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal.
* Consider holding eligible investments that are subject to higher tax rates (i.e. interest and foreign dividends).

Pooled registered pension plan (PRPP) – Consider joining a PRPP if you do not have access to an employer-sponsored pension plan. PRPPs are a voluntary savings plan similar to a defined contribution RPP or RRSP.

RRSPs, RPPs and DPSPs – If you contributed less than the maximum allowable amount to your RRSP in a previous year, use the unused contribution room in addition to your normal contribution room for the 2017 tax year. If you decide not to contribute your entitlement for 2017, your ability to do so carries forward indefinitely. However, even if you do not need the deduction in 2017, you should still make the contribution if you have excess funds, so the funds can start to grow on a tax-deferred basis. You can claim the deduction in any future year.

Other personal items
Donations of private corporation shares
* Donations to registered charities are treated as a deduction for corporations and a tax credit for individuals.
* Donations of public company shares are exempt from capital gains tax.

Gifts to foreign charities
Foreign charitable foundations can be registered as qualified donees if:
* They receive a gift from the government,
* They are involved in activities of disaster relief or urgent humanitarian aid, or
* They carry on activities in the national interest of Canada.

Investment holding company – Ontario residents with incomes exceeding $220,000 in 2017 who earn investment income from portfolio investments will be subject to Ontario’s high-earner income tax. Consider holding these investments in a corporation to benefit from the lower corporate tax rate on investment income. As mentioned above, the Department of Finance will be announcing new passive investment income rules in the 2018 budget.

Interest deductibility – If you are incurring non-deductible interest and have cash or investments on hand, consider paying down non-deductible debt and then borrowing to replace those investments. However, be mindful of triggering gains if you liquidate investments.

Capital gains and losses – If you have capital gains this year or in 2016, 2015 or 2014, consider selling an asset with an accrued loss, which can then be offset first against capital gains from 2017 and then any excess against those prior years’ gains to recover tax. Before triggering losses, consider the superficial loss rules (below). If you have little or no other income or have capital losses to use up, consider triggering capital gains before year-end by selling an investment that has appreciated in value and reinvesting the proceeds, even in the same investment.

If certain conditions are met, you can dispose shares of an eligible small business corporation and defer the recognition of capital gains by reinvesting the proceeds from the sale of those shares in another eligible small business corporation by April 30, 2018.

Superficial loss rules – The superficial loss rules prevent a taxpayer from claiming a capital loss on an asset the taxpayer clearly intended to continue to hold. If you are holding an asset with an accrued loss and wish to sell the asset to offset the loss against any capital gains realized and you purchase the identical asset within 30 days – either before or after selling the original asset – the superficial loss rules will apply to deny the capital loss, provided that the asset is held at the end of 30 days after the sale. The superficial loss would also apply if your spouse or a company controlled by you or your spouse buys the asset within the same time frame.

Eligible dividends
* Eligible dividends may trigger AMT; and
* Eligible dividends could be tax-free if paid to individuals in lower tax brackets or who have significant non-refundable tax credits, such as tuition and education amounts. (However, see TOSI proposals above.)

First-time donor’s super credit – A first-time donor is entitled to claim an additional 25% credit on up to $1,000 of donations made after March 20, 2013. The credit can be claimed only once, after 2012 and before 2018.

What do families need to know?

Estate planning – Ensure your estate plan is meeting your current and future objectives. Also ensure that your will is up to date.

Income-splitting – Consider an income-splitting plan to lend funds to family members in lower tax brackets. A “reasonable” test for the payment of salaries to family members already exists, and the Department of Finance will be introducing a reasonable test for dividends. Details will be announced later this fall. The current prescribed rate is one per cent. Interest on intra-family loans must be paid on or before January 30, 2018, to avoid attribution of income.

Split income with minor – Commencing with the 2015 taxation year, the income attribution rules apply to “split income” that is paid or allocated to a minor from a trust or partnership, if:
1. The income is derived from a business or a rental property; and
2. A person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property or has a direct or indirect interest in the partnership.

Registered Education Savings Plan (RESP)
* Plan your contributions to ensure the RESP will receive the maximum lifetime Canada Education Savings Grant (CESG) of $7,200.
* Asset transfers between RESPs for siblings are now allowed, subject to certain criteria.

Registered Disability Savings Plan (RDSP) – If you have a child who qualifies for the Disability Tax Credit, you should:
* Set up an RDSP to qualify for the Canada disability savings bond (maximum lifetime of $20,000 per child).
* Contribute to an RDSP to qualify for the Canada disability savings grant (maximum lifetime of $70,000 per child).

Child care expenses – Available deductions for child care expenses will remain the same as in 2016. Boarding school and camp fees qualify for the child care deduction, though limits may apply. Ensure that child care expenses for 2017 are paid by December 31, 2017 and a receipt is obtained.

Tuition, education and textbook tax credits – Effective January 1, 2017, the federal education and textbook tax credits are eliminated. The tuition tax credit remains. Eligible fees for exams taken after 2010 may qualify for the tuition tax credit.

Unused and unclaimed tax credits – Consider transferring your education, tuition or textbook tax credits to your spouse, parent or grandparent, subject to limitations, if you are unable to utilize them. Unused education and textbook credit amounts carried forward from years prior to 2017 may be claimed in 2017 and subsequent taxation years.

Moving expenses – Your moving expenses may be deductible if you moved to attend school or moved from school to work or back home.

Lifetime Learning Plan (LLP) – You are allowed to make a tax-free withdrawal from your RRSP to finance full-time education – or part-time for students who meet one of the disability conditions – for yourself, your spouse or your common-law partner. You may withdraw up to $10,000 in a calendar year and up to $20,000 in total.

The golden years

Inter vivos trust – If you are 65 or older and live in a province with a high probate fee, consider establishing an inter vivos trust as part of your estate plan.

RRSP – If you turned 71 in 2017, you must collapse your RRSP. You may:
* Defer taxes on all or a portion of the amount in your RRSP by transferring the funds to a registered retirement income fund (RRIF);
* Contribute to your RRSP only until December 31, 2017 if you have unused RRSP contribution room or earned income in the previous year;
* Contribute to your spouse’s RRSP until the end of the year that your spouse reaches age 71 if you have unused RRSP contribution room or earned income in the previous year; and
* Make an additional 2017 contribution (facts depending) by the end of December 31, 2017.

Pension income – If you receive pension income, consider splitting it with your spouse or common-law partner, to a maximum of 50%. To maximize your pension credit, you will require at least $2,000 of pension income if you are age 65 or older.

Old Age Security (OAS) – Allocation of pension income from a spouse or receipt of dividends may trigger the OAS clawback. Consider measures to invest so as to earn capital gains, as only 50% of the gain is included in income for the purposes of calculating the OAS amount. Alternatively, explore additional options to manage your income (i.e. through a corporation), in order to avoid the OAS clawback.

Canada Pension Plan (CPP) – If you are 60 to 70 years of age and employed or self-employed, you must contribute to the CPP. However, if you are between the ages of 65 and 70, you can elect to stop these contributions. This election can be revoked the following year. Be aware that CPP benefits are reduced if you begin collecting prior to turning 65.

Individual pension plans – If you are over 71, you must make minimum withdrawals if you have a defined benefit RPP that was created primarily for you.

Key tax dates
December 15, 2017
* Final quarterly instalment of 2017 tax due for individuals.

December 27, 2017
* This is likely the final trading day for Canadian exchanges for those wishing to have trades settled for 2017.

December 31, 2017
Last opportunity to make a payment for the following items in order to utilize any applicable credit or deduction on your 2017 return:
* Charitable donations
* Payment of union dues and professional fees
* Investment counsel fees, interest and other investment expenses
* Alimony and maintenance payments
* Child care and child fitness expenses
* Interest
* Medical expenses
* Moving expenses of individuals
* Political contributions

* Deductible employee legal fees

* Tuition fees and interest on student loans

* Payments to employer to reduce standby charge

* RRSP contributions if you turn 71 during 2017

January 16, 2018
* US taxes: estimated tax payments due for individuals for 2017 fourth quarter

January 30, 2018
* Interest due on intra-family loans

* Non-deductible interest due on loans from your employer to reduce your taxable benefit

February 14, 2018
* Payment to your employer to reduce your taxable operating benefit from an employer-provided automobile

February 28, 2017
* Last day to file T4, T4A and T5 Summary and Supplementary forms

March 1, 2018
* Deductible contributions to your own RRSP or spousal RRSP (for 2017 deduction)

* RRSP Home Buyer’s Plan repayment due (to avoid 2017 inclusion)
March 15, 2018

* First quarter (2017) personal tax instalment due

April 2, 2018 (March 31, 2018 is a weekend day)

* Last day to file income tax returns for inter vivos and testamentary trusts without penalty

* Last day to file NR4 summary and supplementary forms regarding amounts paid or credited to non-residents of Canada

April 16, 2018
* US individual tax return due if an extension was not obtained from the IRS
* If an extension to file the US individual tax return was obtained, any estimated tax liability is due

April 30, 2018
* Last day to file personal tax returns, except for self-employed individuals or spouses of self-employed individuals, in which case, the deadline is June 15, 2018. No matter your deadline, interest will be charged on any balance due after April 30

* Filing deadline for personal return may be later if individual or spouse died during the year. However, a terminal return is required

Thanks for reading!
The Practical Planner
https://practicalplanner.ca

If you have any questions, please feel free to reach out to us.  We are here to help you with all your financial and tax needs.

–Follow Us On Social Media–
Facebook – https://facebook.com/PracticalPlannerCanada 
Twitter – https://twitter.com/PracticalPlanr
Instagram – https://www.instagram.com/practicalplannercanada/

Leave a Reply

Your email address will not be published. Required fields are marked *