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Year-end tax planning checklist

There are only three weeks left until Dec. 31, and there is no better time than now to compile your annual checklist of tax saving strategies, designed to reduce your income tax bill for 2018.

  1. Convert dividends to capital gains.

If you took large draws from your corporation, which would normally be reported as dividends on your tax return, consider converting those dividends to capital gains. The tax savings are huge. Check our Nov. 6 newsletter for more details.

  1. Plan your remuneration for family members.

The new income splitting restrictions eliminate the benefits of allocating income to family members in lower tax brackets. As your PJ&A trusted advisor, we work with you to determine the best remuneration strategy. It is interesting that the new restrictions do not apply to salaries paid for actual work performed. However, salaries paid to family members must be reasonable. A good test of reasonableness is to pay them what you would have paid to a third party.

  1. Donate securities prior to December 31, 2018

Rather than donating cash to your favorite charitable organization during the holiday season, consider transferring stocks or mutual funds with unrealized gains. You do not pay tax on the gain, and you can claim the full fair market value of the investments as a charitable donation.

  1. Triggering gains or losses.

Check with your PJ&A advisor to find out if there is a benefit to selling investments with accrued losses to offset capital gains. Any net capital loss that cannot be used in the current year can be carried as far as three years back or carried forward indefinitely to offset net capital gains in other years. Depending on your unique tax situation, there often is a benefit to triggering capital gains this year. To complete the settlement by Dec. 31, the trade date must be no later than Dec. 27, 2018.

  1. Make expenditures before year-end

If you are planning any capital expenditures in the near future, consider purchasing these assets prior to the end of the year.

According to the Finance’s 2018 Fall Economic Update on November 21, 2018, the government announced accelerated tax depreciation on assets acquired after November 20, 2018. Prior to the change, if you purchased equipment, for example, which has a depreciation rate of 20%, you would be eligible to claim 10% in the year you purchase the assets, due to the half-year rule.

Under the new rule, you are eligible for a depreciation rate of 30% of the cost of the asset, which is one-and one-half times the depreciation calculated using the prescribed rate of 20% or three times the 10% depreciation that could otherwise be claimed in the first year.

  1. Make loans to split investment income

If you are in a high tax bracket, you can arrange to shift investment income to family members in a lower tax bracket. To do this, you simply lend funds to family members provided the rate of interest on the loan is at least equal to the CRA-prescribed rate, which currently is 2 per cent until Dec. 31, 2018. If you implement the loan arrangement this year, the 2 per cent interest rate is locked in and will remain so for the duration of the loan. The income is taxed at the family member’s tax rate and the interest on the loan for each calendar year must be paid annually by Jan. 30 of the following year.  The interest is deductible against the investment income of the family member.

  1. Contribute to an RESP

Take the edge off the high cost of post-secondary education by contributing to a RESP before the end of the calendar year. A contribution of $2,500 will generate the maximum annual education savings grant of $500, or 20 per cent of the contribution. The lifetime maximum savings grant per child is $7,200.

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