Canada: Tax, Holidays: 'Tis The Season... For Year-End Tax Planning

Ways To Trim Your Tax Bill
Last Updated: December 17 2014
Article by Samantha Prasad

THE HOLIDAY SEASON IS officially here, and with it comes one of my holiday traditions: sharing some of my year-end tax planning tips. While my holidays are also full of family time, Christmas trees and hiding presents from nosy little ones, it's still important to take time to ensure I'm doing all I can to reduce my tax bill before the new year. Here are some tips on how you too might be able to trim your tax bill for 2014 (and not just your Christmas tree).

Claim an Allowable Business Investment Loss

While capital losses can only be used to reduce capital gains, 50 per cent of an Allowable Business Investment Loss (or ABIL") can be used to reduce all types of income. Therefore, if you're a shareholder or creditor of an unsuccessful private corporation, consider selling your shares or debt by year-end.

To claim an ABIL, the investment must be in a private Canadian corporation. The general rule is that, at the time the sale is closed (and done at a loss), the company must have been a "small business corporation"; Canada Revenue Agency requires that 90 per cent or more of the value of the company's assets must be used principally in an active business carried on primarily in Canada. One final restriction: the loss reverts to an ordinary capital loss to the extent that you have claimed the capital gains exemption in a previous year.

To claim an ABIL, the sale should be to a person who is "at arm's length." This means you can't sell to persons who are related to you for tax purposes, included to you for tax purposes, including a spouse or common-law partner, child or grandchild, sibling, or a controlled corporation, for example. There is also a factual test: it is possible that Revenue Canada could say the purchaser does not deal at arm's length with you if you were the directing mind or you acted in concert with the purchaser. Accordingly, if a large loss is involved, care must be taken. (Alternatively, the loss may be available in situations where the company has gone out of business.)

And if you're wondering why I'm focusing on the technicalities, it's because ABIL claims are generally put under the micro- scope by Revenue Canada. At the very least, you should expect a review of your claim by Revenue Canada. Normally, a questionnaire is sent to you, asking for details on the investment, as well as asking you to back up the company's status as a "small business corporation." So before you decide to claim an ABIL, make sure your ducks are all in a row.

Last Minute Income Splitting

Income splitting with low-bracket family members is always a good way to trim your tax bill. The following are some income-splitting strategies that may be relevant at year-end.

1) You can split income with low-tax-bracket family members by making loans to them (e.g., a spouse, common-law partner or a child under the age of 18), provided that Revenue Canada's "prescribed rate" is charged on the loan. The rate is adjusted quarterly; currently, it is still at the low level of one per cent. Interest must be paid with- in 30 days after the end of each year. Otherwise, the "attribution rules" may apply, with the result that the income is taxed in your hands. Make sure that the interest payment is properly documented; e.g., via a cheque deposited to your account.

Occasionally, you might want to purposely trigger the attribution rules. For example, if the investment is generating losses, the attribution rules may allow you to claim them on your return. In this case, a strategy may be to purposely miss the interest-payment deadline. However, if this is done even once, the "prescribed rate loan" exemption will no longer apply to investments made from that loan on a go-forward basis.

2) The higher-bracket spouse should pay all household expenses (including the lower-bracket spouse's income tax), permitting the lower-bracket spouse to invest his or her income. The income earned on the investments will be taxed on the lower-bracket spouse's tax return; i.e., at a lower tax rate.

3) Retired couples can split Canada Pension Plan benefits. If one spouse/common-law partner has a significantly lower income, consider splitting CPP benefits in order to produce tax savings.

4) Couples that are 65 years of age or older can also pool their retirement pension income. In order to do so, both the recipient of the eligible pension income and the spouse must agree to the allocation in their tax returns for the year in question.

5) If you have a family trust and you want to ensure that the low-tax-rate beneficiaries are taxed on the income distributed from the trust, it is necessary that the income be either paid or payable by the end of the calendar year. If actual payments are not made, then promissory notes or other evidence that there is a legal obligation to pay should be in place. To the extent that funds are actually paid, ensure that they are paid to the actual beneficiaries and deposited to their accounts. Proper trust documentation should also be in place reflecting the income being paid or payable to the particular beneficiaries.

Defer Tax on Interest

The Income Tax Act allows a deferral of tax on an interest- bearing investment for one year after its purchase, unless the interest is paid or credited to a taxpayer's account in the meantime. Accordingly, for investments on which interest payments are deferred (e.g., payments that occur once or twice a year), it may make sense to make the purchase early in the new year, rather than late in the current year, since this means that at least a portion of the interest payments will be "kicked over" to the next year.

Claim reserves for capital gains incurred in the year

If you have sold assets in 2014 and realized a capital gain, in some cases, you may be able to claim a capital gains reserve to defer recognition of that capital gain for tax purposes. How so? You can claim a reserve if you sell a property but do not receive all of the proceeds right away; for example, by selling shares that have appreciated and taking back a promissory note as consideration. Under the reserve rules, you need only recognize one-fifth of the gain in the current year and each later year (cumulatively). In that way, the entire capital gain will be accounted for by the fourth year after the year of sale.

Originally published in The TaxLetter

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Samantha Prasad
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions