2015 Year End Tax Tips

StartFragmentEvery 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?

The contribution limit for the Tax Free Savings Account is reduced to $5,500 for 2016. Prior year contribution room is not affected. As a reminder, if you withdraw funds from your TFSA an equivalent amount of contribution room will be reinstated in the next calendar year. If you re-contribute within the same calendar year and you do not have excess contribution room then you will be hit with an over contribution penalty. Lastly, if you are planning to withdraw funds from your TFSA in 2016, consider making the withdrawal by December 31 2015 so that you do not have to wait until Jan 1 2017 to recontribute the amount withdrawn.
The minimum RRIF withdrawal factors has been reduced in 2015 so if you had withdrawn more than the minimum you can put money back into your RRIF by Feb 29 2016 and this amount will be tax deductible for the 2015 tax year.

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 2015. 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 2015. 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 2015, 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 2015 that will generate RRSP room for 2016. While you will pay a penalty of 1% on the over contribution (above the $2,000 over contribution limit), for Dec 2015, new RRSP room will open up on January 1, 2016 so the penalty will cease in January 2016. You can then choose to deduct the over contributed amount on your 2016 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. RRSP Contributions The deadline for RRSP contributions is Feb 29, 2016. 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. 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 2015. 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 2015: a) Charitable Donations (remember - additional tax savings for donation amounts greater than $200. b) 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. c) Investment counseling fees for non registered accounts d) Interest paid on money borrowed for investing e) Child care expenses f) 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. If your medical expenses will be less than this amount consider prepaying for expenses that you would otherwise pay in 2016. 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 2016 by Dec 31 2015 to claim them in the current year. Purchase Business Assets in 2015 If you are a business owner you may wish to purchase business equipment or office furniture in 2015 instead of 2016. Under the "half-year" rule, you are permitted to deduct one half of a full year's tax depreciation in 2015 even if you bought it on the last day of the year. For 2016 you can claim a full year's depreciation. Claim a "closer connection" exemption If you spend on average four months a year in the US, you may be considered a US person for tax purposes if you meet the substantial presence test. The closer connection exemption will allow you to avoid the need to file US taxes - you must complete form 8840 with the IRS. Other Tax Planning Ideas

If you purchased your first home in 2015 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)
Adjust your instalment payments if you believe that your income is lower in 2015 than in the prior year
Postpone investing in mutual funds that are outside of your RRSP or TFSA until 2016 so that you won't have the 2015 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 $813,600 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.