By Fin Macdonald, Fin Tax Service
Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
The ongoing attempt by various business interests to roll back Federal Finance Minister Bill Morneau’s tax reforms for Canadian Controlled Private Corporations (CCPC) continues. Morneau has indicated that he may make some changes, but nothing is expected until the next federal budget. Tax policy in such flux is good for no one and doesn’t help those tying to plan. Which leads me to this month’s topic: Year End Tax Planning.
How Taxes Work
In Canada our income tax system features increasing tax rates as one’s taxable income goes up. In BC there are five tax brackets for 2017 taxes.
In 2018, in BC, a new bracket for incomes over $150,000 of 16.8% will be added.
So, if your Taxable income for 2017 is more than $202,800, the tax payable on the amount over that will be 47.7%. One of the goals of tax planning is to lower what is called your Marginal tax rate – the percent of tax you pay on your top dollar of income.
This month I’m going to look at tax planning for self-employed people and investors.
Self-Employed People and Year End Tax Planning
Being able to control when expenses for the business are undertaken is one of the keys to tax planning for self-employed people who do not conduct their business through a CCPC. At this time of year your income for the year is usually clear – income must be reported in the year that the work was done to produce the income. Looking at your income and expenses will show a good idea of what your taxable income will be for the year.
Next, what equipment needs replacing? Expenses fall into two categories: those that can be deducted in full the year they are made, and expenses for Capital Equipment which are subject to a multi-year depreciation know as Capital Cost Allowance (CCA). Examples of expenses are office supplies, fuel and maintenance for vehicles, travel costs, rent, salaries and benefits, and licenses and fees. Examples of items requiring depreciation are vehicles, buildings, computers, tools with a value of more than $500, and dishes, utensils and linens one would use in a restaurant.
If your business needed a new truck, and you bought one costing $25,000, a truck is in CCA class 10. In class 10 the depreciation rate is 30%. However, in the year an asset is acquired, only half of the depreciation may be claimed. So, $25,000 times 30% divided by 2 would equal CCA of $3,750 the first year. In the second year $6,375 would be available and $4,462.50 in the third year. You are not required to claim CCA in any given year. The amounts quoted above are the maximums, if it makes sense not to claim the whole amount. For example if your business was not profitable this year, you are not required to claim the CCA.
How are your accounts receivable doing? Is it time to write off some of your long in the tooth accounts? Year end may be the time to do so. Is it time to provide you and your employee(s) with extended health insurance? As a self-employed person you may deduct the costs of extended health insurance from your business income. Unlike other taxpayers, your extended health premiums are not subject to the 3% of net income deduction.
Investors and Year End Tax Planning
First off, how has your portfolio done? Is it time to take some profits? This year, December 22 is the last day for trades to clear before year end. Selling your losers may trigger what are known as “Superficial Loss Rules” (SLR). Simplified, SLR states that if within 30 days after you sell a stock, mutual fund or other capital product you purchase the same product, any loss arising from the sale cannot be claimed as a capital loss. This also applies to purchases made by related persons such as spouse and children. If the SLR does not affect your losses, they may be used to offset your gains this year. If the losses are greater than your gains, they may be carried back up to three years to use against your capital gains of those years.
Second, how are you reporting your investment expenses? While it is nice to be able to deduct the fees advisors, traders and accountants charge, are you getting a good deal? When reviewing your portfolio, a review of your investment expenses is also in order.
Third, with interest rates at historic low rates – the Canada Revenue Agency’s (CRA) Prescribed Interest Rate for the 4th quarter of 2017 is 1% - have you explored income splitting opportunities with your spouse? Normally, if you give a related person, such as a spouse or child, money or capital products such as stocks or mutual funds, under the Attribution Rules the income that money produces is taxable in YOUR hands. However, by loaning the money for your spouse to invest, as long as s/he pays the interest due, to you, by January 30 of each year, the income is taxed in his/her hands. There is no requirement for the spouse to repay the capital. The interest paid to you is taxable in your hands. Over a number of years this can provide significant income splitting and tax lowering for those not eligible for Pension Income Splitting.
Next month I’ll continue my look at Year End Tax Planning, looking at donations, medical expenses, RRSPs and TFSAs. As always, dear readers, through my lens of Helping You to Keep More of YOUR Money, I enjoy writing this column in our community newspaper.