Stay Ahead of the CRA
Early tax tips and strategies for 2018
Many investors are aware of the importance of tax planning near the end of the year to minimize their income tax liability. However, often-neglected areas of tax planning include meeting the important deadlines for implementing tax planning strategies that may only be available early in the new year. The purpose of this shortened article, is to summarize some of the strategies that have deadlines in early 2018.
2017 RRSP contribution deadline
The deadline for you to make a contribution to a registered retirement savings plan (RRSP) that can be claimed as a 2017 RRSP tax deduction is generally the 60th day after the year-end, which falls on Thursday, March 1, 2018.
2018 RRSP contribution room
It is generally a good idea to contribute to your RRSP as soon as possible to maximize the tax-deferred growth in your plan. January 1 is the earliest day you can make a 2018 RRSP contribution using the new room that is created from your prior year’s earned income without triggering an over-contribution penalty. If you wish to make an RRSP contribution early in the 2018 calendar year, you may need to estimate your 2018 RRSP deduction limit. This is because you may not have received your 2017 notice of assessment (NOA) which provides a statement of your 2018 RRSP deduction limit. To estimate your 2018 RRSP deduction limit, take 18% of your previous year’s (2017) earned income up to the RRSP dollar limit of $26,230 for 2018, and subtract any 2017 pension adjustment. If you are unsure of your earned income amount or the results of your calculation, you should wait until you receive your 2017 NOA.
Tax-Free Savings Account (TFSA)
Consider making a contribution to your TFSA early in the 2018 calendar year to maximize the tax-free growth in your plan. The TFSA contribution limit was $5,000 per year for the years 2009 to 2012, $5,500 for 2013 and 2014, $10,000 for 2015 and $5,500 for 2016, 2017 and 2018. If you have been eligible to open a TFSA since 2009 and have not yet contributed to one, your contribution limit would be $57,500 as of January 1, 2018. If you did not use your contribution room in a previous year, the unused room is carried forward indefinitely.
Family income splitting loans
A potential way to split income with family members involves setting up a prescribed rate loan with your spouse, adult family members, or minor children through a family trust.
If you previously set up a prescribed rate loan, it is critical that the annual interest on the loan be paid on or before January 30, 2018. If you miss the January 30th deadline, attribution may apply to you, the lender, for the 2017 taxation year and all future years that the loan is in place. This would defeat the purpose of setting up such an income-splitting strategy since the income and/or capital gains may be taxed in your hands. Make sure that your spouse, your other family members or family trust actually issues a payment from their account to yours for the interest payment.
Eligible retiring allowance
If you received a retiring allowance in 2017, you have until March 1, 2018 to transfer the eligible portion to your own RRSP without affecting your RRSP contribution room. Your eligible retiring allowance cannot be transferred to a spousal RRSP. This transfer will allow you to defer taxation on the eligible retiring allowance received until it is withdrawn from your RRSP in the future. Unlike regular unused RRSP deduction room that you can carry forward each year, if you do not transfer your eligible retiring allowance by March 1, 2018, you will lose the opportunity to do so forever. That said, if your eligible retiring allowance is paid to you over two years, for example in 2017 and 2018, you will still be able to transfer the portion received in 2018 to your RRSP any time in 2018 or early in 2019.
Mutual fund purchases
When you purchase a mutual fund part way through the year, your purchase price includes any accumulated income and gains that have not yet been distributed. When the fund makes a distribution, the distribution includes these accumulated earnings and is fully taxable even though you purchased the accumulated earnings with your after-tax dollars. One way to avoid receiving this distribution is to simply purchase the fund after the distribution date. If you delayed purchasing mutual funds last year to avoid the year-end distributions, consider purchasing mutual funds now, in the new year.
Business owners paying a bonus
If your corporation declared a bonus in 2017, remember to pay that bonus within 179 days after the corporation’s year-end. Canadian tax rules allow a corporation to deduct a bonus declared to an employee on the corporation’s previous year’s tax return as long as the bonus is paid within 179 days after the corporation’s year-end.
T4 Filing Deadlines for Employers
If you have employees in your business or you employ a nanny or babysitter, you must file the appropriate T4 forms to the CRA by February 28, 2018. A copy of the T4 slip must also be delivered or mailed to your employee(s) by this date.
Sale of private company shares
You may have disposed of “qualified small business corporation” shares in 2017 and realized capital gains that cannot be fully exempt under the $835,716 lifetime capital gains exemption. As these deferral rules are complex, consult a qualified tax advisor if you intend to explore this option.
Deadline for corporate taxes - Generally, corporate taxes are due two months after the corporation’s year end. If your corporation’s year end is December 31, 2017, you will need to pay the remainder of the tax your company owes by February 28, 2018.
Conclusion - This article covers some common tax planning strategies that you may want to consider early in the new year. For more information on any of these topics, please speak with your advisor or a qualified tax advisor.
This article may contain several strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax and/or legal advisor before acting on any of the information in this article.
Susan Gottlieb is Vice President and Wealth Advisor with RBC Dominion Securities Inc. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.