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Year-End Tax Planning Considerations

Badger Investment Group - Dec 07, 2021
Are you doing all you can to save tax? With top marginal tax rates of over 50 percent* for the majority of provinces in Canada, the opportunity to reduce the taxes you pay should not be overlooked.
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Are you doing all you can to save tax? With top marginal tax rates of over 50 percent* for the majority of provinces in Canada, the opportunity to reduce the taxes you pay should not be overlooked. As the end of 2021 is quickly approaching, now may be a great time to consider taking certain actions before the close of the year to save on your 2021 taxes. Here are some ideas:

Split income, save tax. Income splitting is the transferring of income from a family member who is in a higher-tax bracket to one in a lower-tax bracket. There are a variety of ways to split income, which can result in a reduction of overall family taxes. Here are just a handful of the more common income-splitting opportunities, in brief. A tax advisor can provide greater detail.

  • Pension splitting – If you have qualifying pension income, you may elect to split this income with a spouse or common-law partner (CLP) on your tax return. For tax purposes, up to 50 percent of eligible pension income received in a year may be split with a spouse. For some individuals, the benefits may go beyond income splitting. Allocating pension income to a spouse without eligible pension income could entitle them to a tax credit that they otherwise would not be able to claim. Reducing income for one spouse could help to enhance access to income-tested tax credits and benefits.
  • Spousal RRSP – If you have a spouse/CLP and believe that you will have a higher income in retirement, you may consider the benefits of contributing to a spousal Registered Retirement Savings Plan (RRSP). With the spousal RRSP, a higher-income spouse will make contributions to the plan and the lower-income spouse will be the owner/annuitant of the plan. Future withdrawals may then be taxed in the lower-income earner’s hands.
  • Business-owner planning – If you own a business, you may pay reasonable salaries to spouses or children for services provided to your self-employed business or private company. If your business is a private corporation, you may consider the opportunity to add family members as shareholders. This may help to potentially use their lifetime capital gains exemption (LCGE, currently $892,218 for 2021) to shelter future capital gains on the sale of the business and to pay dividends to a spouse/CLP and/or adult children who become shareholders.
  • Spousal loan – Income-splitting with a spouse may also be achieved by way of a prescribed rate loan. If the high-income spouse/CLP makes a loan to the lower-income spouse/CLP at the Canada Revenue Agency’s (CRA’s) prescribed rate, which currently sits at 1 percent for Q4 2021, any investment income earned in excess of the interest charged on the loan will be taxed in the lower-income spouse’s hands.

Realize capital losses to offset realized capital gains. Consider realizing capital losses to offset realized capital gains for 2021, or take advantage of the carry-back rules to recover taxes paid on taxable capital gains realized in three preceding taxation years. There also may be opportunities to transfer capital losses between spouses. Remember to do this well before the end of the year and be aware of the superficial loss rules.

Contribute to your RRSP. Don’t wait until the last moment if you are planning to make contributions to your RRSP for the 2021 year. As a reminder, the RRSP contribution limit is 18 percent of the previous year’s earned income, to a maximum of $27,830 for the 2021 tax year. Remember, you will still be able to contribute until 60 days after the calendar year to impact your 2021 taxes.

If you have a student in the family, make RESP contributions. If you have a Registered Education Savings Plan (RESP), consider making a contribution before year-end. While this won’t impact your 2021 taxes, you may benefit from the Canada Education Savings Grant (CESG) for 2021.

Don’t forget the pension income tax credit. If you’re 65 years of age or older and don’t have eligible pension income, consider purchasing an annuity or opening a small Registered Retirement Income Fund (RRIF) before the year-end to enable you to claim the federal pension income tax credit. Eligible pension income may also be split with a spouse on a tax return.

Consider making charitable donations. Make eligible charitable donations before December 31st to benefit your 2021 taxes. Remember that gifting publicly-traded securities with accrued capital gains to a registered charity not only entitles you to a tax receipt for its fair market value, but also eliminates the associated capital gains tax.

Convert your RRSP if you turned age 71 in 2021. If you turned 71 this year, you will have until December 31st to make any final contributions to your RRSP before converting it to an RRIF or registered annuity, or collapsing the RRSP and withdrawing the funds.

Many of these actions require planning, so don’t wait until it’s too late. For further assistance, please contact us. As always, please consult with a professional tax advisor regarding your personal situation as some of these strategies may involve proper structuring to be effective.

*For ordinary income, including employment income, interest income, pension income, etc.

CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA This document is for general information only, not intended to provide tax, legal or financial advice, and under no circumstances should be interpreted as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation only and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person, organization or institution. All investors should consult with a qualified investment advisor or tax professional before making any investment decisions. Tax & Estate advice offered through Canaccord Genuity Wealth and Estate Planning Services.