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December 2004 2004 YEAR-END TAX PLANNING
Tax-planning is simply legally reducing one’s taxable income by taking full advantage of deductions and credits and other techniques. Tax planning is often an ongoing process. However, as we draw to a close of the 2004 Taxation Year, special attention should be paid to year end tax planning The following are some tax planning considerations. Consultation with a tax advisor may be advisable to properly implement certain of the suggestions. TIMING OF INCOME AND EXPENSES Generally speaking, you want to accelerate expenses and defer income. The opposite will be true only if you anticipate high income in 2005 and low income in 2004. Accelerating expenses means making expenditures in 2004 rather than 2005. For example if you plan to purchase a new computer in the first quarter of 2005, consider making the purchase now so that you can depreciate it this year. Income that has been earned cannot be deferred. However if you have a project that you can delay starting until the new year, do so. That way the income won’t be taxed until 2005 and you won’t pay tax on it until April 2006. RRSP’S RRSP contributions are one of the key tax planning tools available. An RRSP allows you to receive a deduction while having your capital earn income tax free until the funds are withdrawn upon retirement. You should contribute to your RRSP as soon as possible due to the additional year of income compounding you can enjoy by making the contribution at the start of the year rather than at the end. For 2004, you can claim an RRSP contribution of up to 18% of income earned from employment or business in 2003, up to a maximum of $15,500. You are allowed to make an excess contribution of as much as $2,000.00 without it being subject to the 1% per month special tax. If you contributed less than the maximum allowable amount of your RRSP in a previous year, you can use your unused RRSP contribution room for 2004 by contributing an additional amount equal to the amount of the unused room. The contribution deadline for 2004 is March 1, 2005. Interest paid on funds borrowed to make an RRSP contribution is not deductible. Generally, if you do borrow, make sure that the earnings in your RRSP are growing at a higher rate than your interest payment on the loan. The allowable limit of foreign content within an RRSP is 30% for the year 2004. Setting up an RRSP for your child is an excellent opportunity to not only save tax, but to also create large gains in long term investment growth, and an even larger deduction when your child starts to pay tax. RESP CONTRIBUTIONS Registered Education Savings Plans are an excellent vehicle to not only save money for your child’s education but also to do it in a tax savings manner while assisted by the government. Although you are not allowed to claim a deduction for the amounts contributed to the plan, the funds nevertheless accumulate tax free. The Governments input into this program (by way of a grant) is equal to 20% of the contribution to the child’s RESP (to an annual maximum of $400 per child). The grant along with the contributions from the taxpayer accumulate until the child goes to college or University. Parents (and certain other relatives) are permitted to contribute up to $4000 per year per child. RETIREMENT If you turn 69 in 2004, you must terminate your RRSP no later than December 31 of that year. If you do not make the appropriate decisions by December 31, the full market value of your RRSP will be added to your taxable income in 2004. When you terminate there are many options available including transferring your RRSP to a Registered Retirement Income Fund or (RRIF), receiving an annuity, receiving a lump sum, or choosing a combination of these options. If your spouse is younger, then consider creating a spousal RRSP so that you can contribute to the spousal plan until your spouse turns 69, (only to the extent that you have unused contribution room). CAPITAL LOSSES If you have suffered capital losses in the current year you can use these losses to reduce your taxes for the current year. If you own publically traded securities that have gone down in value, consider selling them by December 24 to trigger a loss. Be careful of the Superficial Loss rules that prevent a taxpayer from claiming a capital loss on an asset that the taxpayer clearly intended to continue to hold. For example, if you purchase an identical asset within 30 days of selling the first asset, the loss will be denied. If you had capital gains in a prior year and capital losses in the current year, you may be able to carry back these losses against prior years gains and recover taxes paid in said prior year. Once again consult with your professional advisor before proceeding with any loss selling. BUSINESS LOSS: "ABIL" If you have an allowable business investment loss (ABIL), you will be able to reduce your overall taxable income. An ABIL is a loss on shares and/or debt you own of a small business corporation. In order to properly claim an ABIL, all the paperwork, documentation to create the disposition of the shares or to clearly establish that the debt has gone bad must be in place prior to claiming the ABIL on your tax return. Proper planning and preparation with a tax lawyer is essential to having an ABIL claimed properly and accepted. SHAREHOLDER BENEFIT: SHAREHOLDER LOANS If you withdraw funds from your corporation by way of a shareholder loan it must be repaid within 2 corporate year ends, or it will be included in your income. Ensure that if funds that have been borrowed from your corporation are repaid in full before the second year end. SMALL BUSINESS TAX DEDUCTIONS Canadian Controlled Private Corporations with active incomes less than $250,000 have the ability to use a ‘small business’ tax deduction which reduces the rate of taxation on Canadian source business income. An essential tax planning strategy for companies with active income in excess of $250,000 is to declare a bonus to a shareholder of the company in order to bring it’s income back under the $250,000 ceiling. The bonus must be paid within 180 days of the company’s year fiscal year end and all payroll deductions taken and remitted. The bonus must also be properly documented in the corporate minute book. Consultation with you tax professional is important if this type of tax planning is to be undertaken. DONATIONS As with other deductible amounts, consider making any planned first quarter 2005 donations before the end of the year. Also consider donating the shares of publicly traded company to a charity.
QUICK TIPS FOR 2004 YEAR END TAX PLANNING Last Year’s Filings Review last year’s tax return and the latest Assessment or Notice of Reassessment from previous taxation years to determine if there are any unused amounts carried forward from these previous taxation years. Transfer Tuition Credits: If a student does not use all of their tuition and education amounts on their income tax return then they can transfer the unused portion to their spouse/common law partner, parent or even grandparent. Investments: Make sure that your investment portfolio is in order, including the records of your investment income and expenses. Employment Expenses: If you are an independent contractor, and your employment arrangement/contract requires you to provide your own office, vehicle or other tangible assets in order to perform your work then make sure that you have gathered all of the related invoices, agreements, automotive (repair) and expense details, as well as any reimbursements received from your employer. Business Expenses: Generally, you are allowed to deduct in the year all "reasonable" expenses incurred for the purpose of earning business income unless otherwise prevented due to a provision of the Income Tax Act. Because the expenses are deductible as incurred, there may yet be an advantage to incur certain expenses late in the fiscal year in order to reduce income for the year. Common expenses such as replenishing office supplies and inventory can lead to a savings of tax. You should definitely consider purchasing stationary, photocopying supplies, printer ink and other general office supplies before the year end. Furthermore, you should be aware of expenses that will be invoiced in 2005 that may have been incurred in 2004.
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