Prime Minister Justin Trudeau recently named Bill Morneau, the rookie Toronto MP, as Canada’s new Minister of Finance. Morneau’s first priority will be to make good on Trudeau’s promise to reduce taxes on the middle class by raising them on the wealthy. He has a big job ahead of him since Trudeau has asked for new tax legislation to be ready by the New Year. Morneau has some experience in this area, having advised Trudeau on economic policy since early 2015 and assisting Ontario Premier Kathleen Wynne on the Ontario Pension Plan.
With pending tax changes only a few weeks away, now is the time to consider your tax planning moves for 2015 and 2016. To assist you, we have prepared this brief overview of the considerations.
Recognize Income in 2015 vs. 2016
The Liberal election platform promised to introduce a new top Federal bracket of 33% which will make the Ontario combined rate (including the current provincial surtax) 53.33% (the top rate for 2015 is 29% / 49.53%). This new rate will apply to annual taxable income of $200,000 or more. As a result, individuals can realize absolute savings of 4% by receiving income such as salary or bonuses in 2015 rather than 2016.
This saving would also apply to income from interest, rents, royalties and personally earned business income. However, before making any decisions, you should consult a Chartered Professional Accountant (CPA) who can advise on such issues as payroll taxes, Ontario Health Tax, and Alternative Minimum Tax.
Gains from Exercise of Stock Options
The Liberals plan to implement an election platform plank to limit the amount taxpayers can claim through the use of the 50% stock option deduction. The benefit of this deduction is that the tax on the stock option benefit is the same as a regular capital gain. The new government plans to remove the benefit on gains in excess of $100,000, so if you’re in the position of being able to crystallize gains in 2015, it may be advisable to do so.
Tax Loss Sales of Investments
This is a strategy whereby you sell securities that have declined in value in order to realize the capital losses to apply against capital gains that have occurred during the year or previous three years. You should consult a CPA to ensure that you comply with special rules that apply to artificial (superficial) losses and ensure that all trades are completed before December 25, 2015.
Rollback of TFSA Limits
Although we are not sure how the Trudeau government plans to implement plans to cancel the Conservative policy of increasing TFSA limits, it is advisable to make a contribution of up to $10,000 for 2015 and top up any unused TFSA limits before the end of 2015. The Liberals plan to reset the annual limit back to $5,500 beginning January 1, 2016.
Legal Family Income Splitting
This little-used strategy involves loaning money to family members at the all-time low “prescribed” interest rate of 1% per annum. The borrower then acquires income-producing assets such as securities, rental property, etc., and reports the income at a lower marginal tax rate. In this manner, income can be shifted to a family member who may have no or little other income and, therefore, pays much less tax. This mechanism works indefinitely, however the interest must be paid by January 30th of each year. (Note that the deadline is 30 days after year end, not one month.)
Another way to take advantage of the increase in personal tax rates for 2016 is to make the maximum contributions available for 2015 and use any available accumulated contribution limit and defer the deduction to 2016 when the top rate will be 4% higher than in 2015. You should also consider making use of the $2,000 “over-contribution limit.” This area is a bit tricky so you may want to speak to your CPA before making a move.
Missing Slips Penalty
A couple of years ago, CRA implemented a new statutory penalty for failing to include income reported on “information slips” (e.g. T3, T4, T4A, or T5). If the income does not appear in the personal income tax return, CRA will reassess and send a bill for the tax and interest owing. In addition to the tax owing, CRA will also assess a penalty of 20% of the amount of income not reported. For example, if a T4 with income of $20,000 is missed, the tax and interest might be $1,980, but the penalty will be $4,000 or 20% of the $20,000 on the slip. We believe that this penalty is egregious, however, it is now law and there is no provision for relief provided in the Act. It is vitally important that you ensure that the information you provide to your CPA is complete to avoid this penalty.
The Liberal election platform also promised changes to items including the Canada Child Tax Benefit, Students Textbook and Education Tax Credits, Old Age Security, and the Home Buyers’ Plan. Once Finance Minister Morneau gets settled in his new position, he’ll be able to define how the promised changes will be implemented.
Your Sloan Partners LLP professional advisor will be able to help you review your personal situation and determine how best to plan your income tax affairs to minimize the tax you pay.
Please feel free to contact us before the end of 2015 to schedule an appointment to discuss steps that can be taken to help you save money at tax time.
Jerry Paskowitz is a Partner with Sloan Partners with over 30 years’ experience in all tax and financial matters. Contact Jerry for an appointment to discuss tax savings opportunities and financial strategies for your business.