Pre-Holiday Tax Tips 2014

Every year I publish pre-holiday tax planning strategies to educate you on ways to avoid paying more than your fair share of income taxes. Please let me know if you would like me to expand on any particular topic.

What’s new?

Income Splitting for couples with children under 18. (Family tax cut credit) Allows a notional transfer of up to $50,000 to the lower income spouse with the tax benefit being capped at $2,000.
The universal child care benefit will increase to $160 per month for children under age 6 and $60 per month for ages 7 to 17.
The child tax credit will be eliminated
The maximum amount that can be claimed under the child care expense deduction will increase by $1,000 eg. $8,000 for children under 6 and $5000 for children from 7 to 16.
The child fitness credit has been increased to $1,000 from $500 per child.

Tax Loss Selling

Selling investments with accrued losses to offset capital gains in other parts of your portfolio. Unused capital losses can be carried back 3 years or carried forward indefinitely. Please note that the trade date must be no later than Dec 24 2014. Beware of the tax loss carry forward OAS trap. A tax loss carry forward does not help to reduce your OAS clawbacks. Please note that if you are investing in another currency you must factor in the gain or loss from the currency exchange.

Superficial losses

If you plan on repurchasing a security sold at a loss the superficial rules may apply if you do so within 30 days before or after the sale date. This will also apply to your spouse or a corporation controlled by you or your spouse. There is a strategy to intentionally trigger a superficial loss to transfer your loss to your spouse.

Use a Prescribed Rate Loan for Income Splitting

If you are in a high tax bracket, it might be beneficial to have a lower income family member invest your money. However if you simply give your money to family members for investment, the income from the invested funds will be attributed back to you.

To avoid attribution, you can lend money to family members at the government’s “prescribed rate” which is 1% until the end of 2014. This interest rate will be locked in and will remain in effect for the duration of the loan regardless if the prescribed rate increases in the future. Note that interest for each calendar year must be paid by January 30th of the following year to avoid attribution of income for the year and all future years.

Convert your RRSP to a RRIF by age 71

If you turned aged 71 in 2014, you have until Dec 31 to make any final contributions to your RRSP before converting it into a RRIF. No sixty day rule allowed. It may be beneficial to make a one time over contribution to your RRSP if you have earned income in 2014 that will generate RRSP room for 2015. While you will pay a penalty of 1% on the over contribution (above the $2,000 over contribution limit), for Dec 2014, new RRSP room will open up on January 1, 2015 so the penalty will cease in January 2015. You can then choose to deduct the over contributed amount on your 2015 or future tax returns. If you have a younger spouse you can still make spousal RRSP contributions until the end of the year your spouse turns aged 71.

Canada Pension Plan

If you are between ages 60 to 64 in 2014 and wish to take CPP prior to aged 65, you may wish to do so prior to Dec 31 2014. The reason is because the downward monthly adjustment factor of 0.56% for each month before aged 65 will increase in 2015 to 0.58%.

RRSP Contributions

The deadline for RRSP contributions is March 2, 2015. Consider making a contribution using a combination of your own money and that of an RRSP loan with a 6 month payment deferral. This way you will have enough time to do your taxes and get your refund to payoff the RRSP loan prior to making your first loan payment.

Tax Free Savings Accounts

Any Canadian resident over the age of 18 can open a TFSA. There is no deadline for making a contribution. If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year. Be careful not to re-contribute into your TFSA within the same year (without having the necessary contribution room) as an over contribution penalty can result. If you wish to transfer funds from a TFSA account to another make sure you do a direct transfer and not a withdrawal to avoid an over contribution problem. Lastly, if you are planning a TFSA withdrawal in early 2015, consider withdrawing by Dec 31 2014 so you would not have to wait until 2016 to re-contribute the amount.

Registered Education Savings Plans

RESPs is an excellent vehicle to save for your child’s education as it offers tax deferred growth and a generous 20% government grant up to a lifetime maximum of $7,200. Making contributions by Dec 31 will allow you to get the grants for 2014. If there is less than 7 years until your child turns 17 and they do not have an RESP you must make a contribution of $5000 per year for 7.2 years to receive the maximum $7,200 grant.

Registered Disability Savings Plans

For residents who are qualify for the disability tax credit and are under the age of 59, a RDSP offers an attractive tax deferred savings vehicle with generous government grants of up to $4,500 per year.

Payments that needs to be made by Dec 31 2014:

a) Charitable Donations (remember – additional tax savings for donation amounts greater than $200. b) Federal First Time Donor’s Super credit provides an additional 25% on donations up to $1000. Only applies if you have not claimed a donation from 2007 to 2013 tax years. c) Gifting publicly traded securities to a charity entitles you to a tax receipt for the fair market value of the security being donated and eliminates the capital gains tax. d) Investment counseling fees for non registered accounts e) Interest paid on money borrowed for investing f) Child care expenses g) Interest on student loans h) Spousal support payments

Medical Expenses

A tax credit can be claimed if total medical expenses exceed the lower of 3% of your net income or $2,171 in 2014. If your medical expenses will be less than this amount consider prepaying for expenses that you would otherwise pay in 2015. Starting in 2014, two new items have been added: 1) amounts paid for the design and subsequent adjustments to an individualized therapy plan provided the cost of the therapy would be eligible. This could include applied behaviour analysis therapy for children with autism. 2) service animals specially trained to assist individuals managing their severe diabetes.

Children’s Arts & Fitness Credit

Each of the above is based on up to $500 (Arts) and $1000 (Fitness) of qualifying expenses. You can prepay for activities in 2015 by Dec 31 2014 to claim them in the current year.

Purchase Business Assets in 2014

If you are a business owner you may wish to purchase business equipment or office furniture in 2014 instead of 2015. Under the “half-year” rule, you are permitted to deduct one half of a full year’s tax depreciation in 2014 even if you bought it on the last day of the year. For 2015 you can claim a full year’s depreciation.

Other Tax Planning Ideas

If you purchased your first home in 2014 make sure you claim the First Time Home Buyers Tax credit and receive up to $750.(Tax adjustments are available for those who did not claim this in prior years)
If you do not have any income the maximum about of eligible dividends you can receive tax free is $49,285.
Postpone investing in mutual funds that are outside of your RRSP or TFSA until 2015 so that you won’t have the 2014 distributions included in your income.
Structure the sale of an asset so that the proceeds are collected over more than 1 year. The capital gains reserve allows you to spread the tax liability over a maximum period of 5 years.
Individuals receiving pension income may qualify for a $2,000 pension tax credit.
Pension income splitting of up to 50% is available between spouses or common law couples on qualifying income.
Claim the $800,000 capital gains exemption if you are selling qualifying small business shares.
Reduce source withholding taxes from your paycheque by completing form T1213 if you have ongoing tax deductions. This will give you a tax refund on every pay cheque instead of waiting until the end of the year.