Our annual Tax Tips can assist you in your tax planning. It presents some quick ideas and strategies. Please take the time to review your 2011 tax situation and call us for specific recommendations tailored to your needs. We will be pleased to work with you on these and other tax-savings ideas.
1. Tax rates are significantly more favourable for dividend income than interest income.
- The top personal tax rates in Ontario for 2011 are as follows:
- 28.19% for eligible dividends (generally, dividends received from public corporations);
- 32.57% for non-eligible dividends (generally, dividends received from small business corporations); and
- 46.41% for interest income.
- Re-evaluate your investment strategy by comparing the pre-tax dividend rates with the pre-tax interest rates using the chart provided on page two.
2. Defer tax on interest to the following year by investing funds for a one-year term ending in the next calendar year.
3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated from the mutual fund.
4. Existing holding companies that have built up refundable dividend tax should consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay the personal tax on the dividend.
CHANGES TO THE CANADA PENSION PLAN
There have been several revisions to the CPP retirement pension. These changes are intended to enhance flexibility and to support both older and younger workers.
Highlights of the changes include:
- CPP retirement pensions will be lower if taken before age 65.
- CPP retirement pensions will be higher if taken after age 65.
- Introduction of the post retirement benefit. There is a new requirement for an employer to make CPP contributions for all employees until aged 65 regardless of whether receiving a pension benefit. Those aged 65 to 70 years will have the same requirement but may elect not to contribute. These contributions will increase your CPP retirement benefits.
- Changes to the "drop-out" provision. The number of years of low or zero earnings automatically dropped from the calculation of the CPP retirement benefits will be increased thus eliminating more low income years from ones pension calculation.
- Elimination of the work cessation test. You will be able to begin receiving your CPP retirement pension without any work interruption.
Starting January 1, 2012, if you are 65 years of age or younger, you will have to contribute to the CPP if you are receiving a CPP retirement pension and working. If you are 66 to 70 years of age, you will have this same requirement unless you elect to stop contributing to the CPP.
INVESTMENT INCOME - A CLOSER LOOK...
It may be a good time for you to consider whether your investment income is tax efficient and consider investment alternatives.
The table below has been prepared to assist you in this matter. It assumes that your investment goal is to earn an after-tax rate of return of 5%.
It compares what pre-tax yield is required in order to achieve a 5% after-tax rate of return by earning:
- Interest income;
- Eligible dividends (generally dividends received from public corporations); or
- Non-eligible dividends (generally dividends received from small business corporations).
Capital gains and losses
5. If you own qualified small business shares or qualified farm and fishing property, you may benefit from the lifetime capital gains exemption of $750,000.
6. Consider realizing accrued losses on investments to shelter capital gains realized this year and in the previous three years (other than for exempt gains on small business shares or farming property as described above). Note that a loss realized from the disposition of an investment may be denied if you repurchase the investment within a short period of time.
7. If you have significant trading activity, your sales of securities may be considered a business for income tax purposes.
- If your sales of securities is considered a business, your profits will be fully taxable as income (instead of being considered as capital gains taxable at 50%), and your losses will be fully deductible against any other sources of income.
- If you are concerned about your sales of securities being considered a business, you can file a one-time, non-revocable election with the Canada Revenue Agency. This election will treat all of your gains from dispositions of Canadian securities as capital gains (and all of your losses as capital losses) for the current year and all future years.
8. Consider donating publicly-traded securities instead of cash.
- A tax-advantaged gift of securities can now be made to a private foundation as well as to public charities. Any appreciation in the value of the securities will not be subject to capital gains tax if the securities are donated to:
- A registered charity; or
- A private foundation after March 18, 2007. There are special rules that apply to persons not dealing at arm's length with the foundation. For more information, please contact us.
- The donation credit (for individuals) or deduction (for corporations) continues to be available for the fair market value of the securities donated.
- To avoid capital gains tax on the appreciated securities, the actual securities must be transferred to the charity or foundation (i.e., the gift will not qualify for preferential capital gains treatment if the securities are sold and the cash proceeds are donated).
- Similar rules will apply to a capital gain on ecologically sensitive land donated to a conservation charity.
9. Where possible, maximize interest deductions by structuring or arranging your borrowings first for business or investment purposes, and then for personal use.
- Note that the federal government has abandoned the proposed restrictions on the interest deduction on funds borrowed to make investments in foreign affiliates.
10. Where certain business or capital property (e.g., shares, but not real estate or depreciable property) is lost or ceases to earn income, the interest incurred on the related borrowed money may in some cases continue to be deductible.
Tax-Free Savings Account (TFSA)
11. Canadian residents 18 years of age and older can each contribute up to $5,000 annually to a tax-free savings account.
- Contributions to a TFSA are not deductible for income tax purposes.
- Interest on money borrowed to invest in a TFSA is not tax deductible.
- Contributions to and income earned in a TFSA are tax-free upon withdrawal.
- You can give money to your spouse for a TFSA contribution and the income earned on the contributions in your spouse's TFSA will not be attributed back to you.
- You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you may be subject to a penalty tax for each month that you are in an excess contribution position.
Pensioners, retirees and pre-retirees
12. Income splitting opportunity:
- Individuals receiving pension income that qualifies for the pension credit can allocate up to half of this income to their spouse or common-law partner. A determination of the optimal allocation should be considered in tandem with the couple's continued ability to qualify for Old Age Security payments and certain personal tax credits.
13. An individual's RRSP must be converted to a Registered Retirement Income Fund (RRIF) or be used to acquire a qualifying annuity by the end of the year in which the individual turns 71.
- An individual who turns 71 in 2011 can make RRSP contributions by the end of 2011, where contribution room is available.
- An individual can continue to make a contribution to a spousal RRSP until the end of the year in which his or her spouse turns 71, where contribution room is available.
- Losses in an RRSP or RRIF that were incurred after the annuitant's death can be carried back to offset the annuitant's year of death RRSP income inclusions.
If you have disabled or infirm dependents
14. An RDSP is a savings plan that is intended to help parents and others save for the long-term financial security of a person who is eligible for the Disability Tax Credit.
- Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59 years of age.
- To help you save, the Government pays a matching grant of up to $3,500.
As of January 2011, you are allowed to carry forward unused grant entitlements for up to ten years.
- Contributions that are withdrawn are not included in the income of the beneficiary, although the Canada disability savings grant, Canada disability savings bond, and investment income earned in the plan will be included in the beneficiary's income for tax purposes when paid out of the RDSP.
- There is no annual limit on amounts contributed to an RDSP of a particular beneficiary, but the overall lifetime limit is $200,000.
- As of July 2011, a deceased individual's RRSP or RRIF can be transferred tax-free into the RDSP of a financially dependent infirm child or grandchild.
If you have young children
15. Consider saving for your child's or grandchild's education with a Registered Education Savings Plan (RESP).
- An RESP is a trust arrangement that earns tax-free income to be used to fund the cost of a child's or grandchild's post-secondary education. Contributions to an RESP are not deductible for tax purposes and withdrawals of capital from the RESP are not taxed. The beneficiary is taxed on the income portion when withdrawn from the RESP for the purpose of funding his or her post-secondary education. While at school, the child or grandchild tends to have relatively low sources of other income, and, as a result the income is usually taxed at lower rates, if at all.
- For RESP contributions in 2011:
- There is no annual contribution limit;
- The lifetime contribution limit is $50,000 per beneficiary; and
- A federal government grant of 20% of annual RESP contributions is available for each beneficiary under the "Canada Education Savings Grant". The maximum annual RESP contribution that qualifies for the federal government grant is $2,500.
- The 2011 federal budget enhanced the ability to receive education assistance payments for enrollment in universities outside of Canada.
16. Maximize child-care expense deduction and consider the federal Children's Fitness Tax Credit, the Ontario Children's Activity Tax Credit, and the new Children's Art Tax Credit.
- If you have a child under the age of 16 enrolled in a program of physical activity, you may be able to claim up to $500 of related expenses under the non-refundable federal children's fitness tax credit. Costs eligible for the credit include costs for administration, instruction, rental of required facilities, and certain uniforms and equipment.
- The maximum amounts deductible for child-care expenses are $10,000 for a disabled child, $7,000 for children under age seven, and $4,000 for other eligible children (generally, children age 16 and under). In most cases, the spouse with the lower net income must claim the child-care expenses against their earned income.
- You will not be able to claim the expenses incurred for the child's physical activity program for both the child-care expense deduction and the children's fitness tax credit.
- If you have a child enrolled in a qualifying activity, you may be able to claim up to $509 of eligible expenses under the refundable Ontario children's activity tax credit. You may receive a refundable tax credit worth up to $51 per child under 16 years of age, or up to $102 for a child with a disability under 18 years of age. This tax credit covers eligible fitness and non-fitness activities.
- If you have a child enrolled in a prescribed program of artistic, cultural, recreational or developmental activity, you may be able to claim up to $500 of eligible expenses under the new non-refundable Children's Art Tax Credit (CATC). You may receive a non-refundable tax credit worth up to $75 per child under 16 years of age, or up to $150 for a child with a disability under 18 years of age. Costs eligible for the credit include costs of registration or membership, including administration, instruction, and the rental of facilities or equipment.
17. Remember to apply for the Universal Child Care Benefit (UCCB) program:
- Under this program, families will receive up to $1,200 per year for each child under the age of six, paid in instalments of $100 per month per child.
- The application form is available by visiting the following website address: http://www.cra-arc.gc.ca/E/pbg/tf/rc66/README.html.
- Please note that the UCCB payments that your family receives will be taxable to the lower income spouse.
- A single parent can designate the amount of the UCCB payments received to be included in the income of a child to take advantage of the child's lower tax rates.
- Income splitting opportunity:
- If you decide to transfer the UCCB payments to a child, any income earned on the payments by that minor child will be taxable to the child, not the parent. If the child's taxable income is below $10,527 in 2011, the income will not be subject to federal or Ontario tax.
18. It is also important to apply for the Canada Child Tax Benefit (CCTB):
- Apply as soon as the child is born, as the CRA makes retroactive payments up to only 11 months prior to the application.
- The application form is available by visiting the following website address: http://www.cra-arc.gc.ca/E/pbg/tf/rc66/README.html. Note that the application form is the same form that is used to apply for the UCCB.
The CCTB is a tax-free monthly payment for children under the age of 18.
- As of July 2011, legislation was amended to recognize both shared custody parents as "eligible individuals" in the same month for the purposes of the CCTB. This enables both parents to equally share the benefit each month rather than being subjected to a six-month rotational basis. Existing six-month rotational schedules were automatically converted to a shared eligibility arrangement.
If you have your own corporation
19. Consider your optimum salary/dividend mix to achieve less overall tax:
- Salary will qualify you and other family members active in the business for RRSP contributions, Canada Pension Plan (CPP) contributions, and child-care deductions. Dividends will not qualify an individual for these contributions or deductions.
- Dividends, on the other hand, may cost the family unit less in current taxes. Each family member, over 17 years of age and receiving dividend income of approximately $38,500 or less of non-eligible dividends, or $50,000 or less of eligible dividends, from taxable Canadian corporations, will pay little or no income tax, but will pay a small Ontario Health Tax premium. The tax on split income eliminates the tax benefits of paying dividends to children under 18 years of age.
- Consider accessing funds from the corporation that can be withdrawn tax-free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares, or roll in personal assets with a high cost base to the corporation on a tax-free basis to extract the cost base of the assets on a tax-free basis.
20. Consider instalments for 2012:
- The threshold above which corporations must pay income tax, GST and source deductions instalments is $3,000. The threshold will be based on 2011 tax amounts payable.
- Certain Canadian-controlled private corporations are allowed to make quarterly, instead of monthly, income tax instalments. To qualify, certain conditions must be met, including criteria relating to the 2011 taxation year:
- The corporation was entitled to the small business deduction;
- The taxable income of the associated group did not exceed $500,000; and
- The taxable capital of the associated group did not exceed $10 million.
Instalment planning for 2012 can be addressed during 2011 by meeting the conditions where applicable.
If you are self-employed...
21. If you have a home office and you meet certain conditions, you can deduct eligible home office expenses, including a portion of your mortgage interest, home insurance, property taxes, utilities and minor repairs.
22. Consider the potential benefits of incorporating your business.
If you are employed...
23. Reduce tax withheld at source:
- If you will have large tax deductions available to you (e.g., RRSP contributions, tax shelters, interest, business losses, work related car expenses, or alimony), apply in advance to the CRA for a reduction of the payroll withholdings that are withheld from your salary.
- You may also arrange for a reduction in tax withholdings if you are entitled to the Child Tax Credit of $2,131 for each child.
24. Minimize taxable employee benefits:
- Arrange to receive non-taxable benefits from your employer instead of taxable benefits where possible. Examples of non-taxable benefits include: employer contributions to a registered pension plan (the pension is taxable when you receive it); and contributions to a "private health services plan", such as those covering medical expenses, hospital charges and drugs not covered by public health insurance and dental fees.
- If you received interest-free or low-interest loans from your employer, the loans will generally result in a taxable benefit.
- Some of the benefit can be offset by an "interest" deduction if the loans are used for certain purposes.
- If not deductible, be sure to pay any interest payable on the loan for 2011 by January 30, 2012 to reduce or eliminate your taxable benefit.
- Consider renegotiating any home purchase loans from your employer in order to minimize taxable benefits by "locking in" the loan at a lower prescribed interest rate for a five-year term.
If your employer provides you with an automobile...
25. The taxable benefit is based on original cost of the automobile and does not decrease as the car ages. Consider purchasing the car from the company by way of an interest-free loan from your employer and personally claiming depreciation on the car.
- Avoid employer-owned vehicles costing over $30,000.
- You can reduce the taxable benefit if your automobile is used primarily (generally, greater than 50%) for business purposes and by keeping your personal use to less than 20,000 kilometers per year.
Working in the U.S.
26. A Canadian resident who works in the U.S. may deduct contributions made to a U.S. pension plan, under certain circumstances, up to the taxpayer's RRSP deduction limit.
- This will reduce the individual's unused RRSP contribution room.
Income splitting with family members – other opportunities
Consider the following legitimate means of shifting income to family members whose taxable income is below the lowest tax bracket, approximately $41,500. This will allow them to take advantage of certain non-transferable credits, as well as lower tax rates.
27. Income splitting with children over the age of 17 ("adult children"):
- Shift investment income by gifting money to your adult children or to a trust for their benefit, if you wish to maintain control.
- Lend funds to or purchase shares in a corporation whose shareholders are your adult children.
28. Income splitting with adult or minor children:
- Purchase appreciating assets in the names of your children regardless of their ages. Capital gains will be taxed in their hands, not yours.
- Lend money to your children with actual interest payable at the prescribed rate. Earnings in excess of this rate will be taxed in their hands.
29. Income splitting with your spouse or common-law partner:
- Lend money to your spouse or common-law partner to earn business income.
- Have the higher-income spouse or common-law partner incur all household expenses, thus allowing the lower income person to acquire investments which could be taxed at a lower rate.
- Lend money to your spouse or common-law partner with actual interest payable at the prescribed rate. Earnings in excess of this rate will be taxed in your spouse or common-law partner's hands.
30. File and pay your taxes on time
Even if you are receiving a refund, you should file your taxes on time. Filing on time avoids the possibility of late-filing penalties that may be applicable on CRA reassessments.
The deadline for filing your 2011 personal tax return is Monday, April 30, 2012. If you, or your spouse or common-law partner, are self-employed, the deadline for filing your tax return for 2011 is extended to Friday, June 15, 2012. Regardless of your filing due date, if you have a tax balance owing for 2011, you still have to pay the balance due on or before April 30, 2012.
The penalty for late filing your return is 5% of the unpaid taxes, plus an additional 1% for each complete month your return is late (up to 12 months). Penalties are higher for repeat offenders or gross negligence omissions.
Quickfacts for 2011
The maximum RRSP contribution limit is $22,450.
The amount of earned income required in 2011 to maximize your 2012 RRSP contribution room is $127,611 (the maximum RRSP contribution limit for 2012 is $22,970).
The small business deduction limit is $500,000.
Did you know?
In order to assist families to care for infirm dependent relatives, a new Family Caregiver Tax Credit of up to $300 is available. Furthermore, the 2011 federal budget proposed to remove the $10,000 limitation on eligible medical expenses incurred for a financially dependent relative.
Did you know?
You may obtain access to your tax accounts online by applying for a "My Account" on the Canada Revenue Agency's website. This service allows you to check for your tax refund, obtain your RRSP limit, and change your address, to name a few examples.
For more information, please visit http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.
Did you know?
Effective 2010, U.S. social security benefits received may be taxable at a lower effective rate. Eligible residents are allowed in addition to the 15% deduction permissible against U.S. social security income, an additional 35% deduction for a total deduction equal to 50% of the benefits. You are eligible for the enhanced deduction if you have been resident in Canada and receiving U.S. social security benefits continuously since before 1996 or you are receiving these benefits in respect of your deceased spouse or common-law partner who received benefits prior to 1996.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.