Volume 1, Number 2
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.
Year-End Tax Planning Considerations
By Kim Moody, CA, TEP
Moodys LLP Tax Advisors (Calgary)
As we approach December 31, 2001, it's time to think about year-end tax planning for yourself and your family. This article summarizes some of the best tax planning strategies that we recommend for individuals.
- Ensure that all charitable donations are made by December 31; otherwise, they will apply for 2002. If you donate publicly listed shares to a charity, only 25% of any capital gain on hand is taxable (usually 50% of a capital gain is taxable). This can reduce the cost of the gift by 10% or so (assuming a large gain and a small cost base). Donate the shares that have the largest percentage gains.
- Consider shifting income to 2002. Tax rates are continuing to drop across the country. Deferring income to next year may save tax. For example, why not take a Christmas bonus in January?
- To receive the tax benefits of certain expenditures for 2001, ensure that they're paid by December 31. These include medical expenses, union dues, investment counsel fees, investment management fees, alimony and maintenance payments, childcare expenses, moving expenses, political contributions, and tuition fees.
- If you have loaned money to your spouse to bypass the normal income attribution rules, pay the interest on this loan no later than January 30, 2002 to ensure non-attribution of the income.
- Ensure that RRSP contributions for the 2001 taxation year are made no later than March 1, 2002. The sooner that contributions are made, the sooner the tax-free compounding effect will kick in.
- If you have capital losses in your investment portfolio and had capital gains in 1998, 1999, or 2000, realizing these losses this year makes more sense than ever. Do this before December 31, 2001. If capital losses exceed current capital gains, these losses can be carried back to any of the last three years in order to recover taxes paid on capital gains for those years. Even though capital gains are only 50% taxable now, you can apply the losses at the rate in effect on the gains previously reported (for example, 75% before March 2000). But be aware of the "superficial loss" rules, which will deny the loss if the same security is reacquired within 30 days. In addition, losses triggered by transferring securities to a self-directed RRSP are deemed nil. Seek professional advice on your loss utilization strategy.
- If you are a shareholder of a private corporation carrying on an active business, consider reorganizing your shareholdings with a view to income splitting with family members. Income splitting can be accomplished by paying dividends to family members on their shareholdings. But beware of the "kiddie tax" rules, which prevent income splitting with minors through dividend payments. Consider payments to minors through corporate capital gains. This strategy can easily save you $10,000 in tax per child.
- Other income-splitting strategies with minors do not involve the "kiddie tax." Consider paying interest to children, having children realize capital gains, or paying them reasonable salaries. Some strategies can be effectively carried out with an inter vivos trust. Again, so as to avoid unintended results, consider certain attribution rules.
- New legislation allows for the deferral of certain stock option benefits realized by exercising stock options of a publicly traded company. However, the election to defer benefits for the 2001 taxation year must be made in prescribed form no later than January 15, 2002.
- If you disposed of "eligible small business corporation shares" and realized a large capital gain, certain tax-deferral strategies may be available if you reinvest. If you acquire replacement shares of another eligible small business corporation by March 1,2002 or within 120 days after the sale of the former shares (if later than March 1), you may defer or rollover part or all of the gain on the sale of the original shares. Before undertaking this deferral strategy, you and your tax adviser should carefully review the complex rules that apply.
- If your employer provides you with a vehicle and you are subject to the automotive taxable benefits rules for the personal-use portion of its operating costs, ensure that the amount of the benefit is repaid to your employer by February 14, 2002. By doing so you will avoid being taxed on the benefit for the 2001 taxation year.
- Be the recipient of a seasonal gift from your employer (tax-free up to $500) and/or an award for merit (also tax-free up to $500). For some of us, it is more fun to give than to receive. Take a deduction as an employer for tax-free employee gifts and awards within these guidelines-and feel good about it. (See "A Christmas gift from CCRA,")
This list of tax-planning strategies is not exhaustive, but it should provoke thought and help minimize your overall 2001 tax liability. Any member of the Tax Specialist Group would be pleased to assist in reviewing your 2001 tax affairs.