Nobody likes to think about taxes in December. But this year take an hour or so to do some year-end tax planning.
But this year take an hour or so to do some year-end tax planning. You could save hundreds of dollars – money that could be used for more holiday gifts. That’s because the new Liberal government has promised some major tax changes that are expected to take effect in 2016. In taxes, as in life, timing is everything so if you have some discretion on when to take income you should consider how those changes will affect you.
For starters, there’s the much-hyped “middle class” tax cut. If the government acts immediately to fulfill that pledge, the 2016 federal tax rate for the $45,000 to $90,000 bracket (approximate numbers) will drop from 22 per cent to 20.5 per cent. That would produce a maximum saving of about $670, plus applicable provincial tax. Note that these figures are not exact because the precise tax brackets for 2016 had not been released at the time of writing.
This means that if your taxable income is between $45,000 and $90,000, you should try to defer any discretionary income until 2016 so as to benefit from the expected tax cut. Holiday bonuses are a classic example. If your income is over about $90,000 but under $200,000, it doesn’t matter when you take the money. No rate change is expected in the 26 per cent and 29 per cent brackets.
Top bracket taxpayers need to plan carefully. The Liberals have proposed to raise the federal tax rate on people earning over $200,000 by four percentage points, to 33 per cent. Add provincial tax on to that and the combined rate in many jurisdictions will be well in excess of 50 per cent. If you’re in the target range, do everything possible to take income before year-end. You’ll pay a lot more on each dollar in 2016.
The same advice applies to investment income from non-registered accounts. Half of any capital gains are taken into regular income so the tax changes will affect how much you actually keep. If your taxable income is below $90,000 and you’re planning to sell some profitable securities, wait until 2016. If it’s above $200,000, you should consider selling now.
Tax-free savings accounts are another area where acting now may save money later. The Liberals have said they will roll back the annual contribution limit to $5,500, from the current $10,000. We don’t know the exact details of how and when this will happen but it’s possible that 2015 will be the only year in which the $10,000 limit will apply. If you haven’t taken advantage of it and have the money available, it would be a good idea to put it in to your TFSA before Dec. 31.
Here are a few more year-end tax tips to consider:
Make charitable donations. Ottawa offers generous tax credits for donations to registered charities (29 per cent after the first $200, plus a special credit for first-time donors). It’s easy to make donations on line and you’ll receive a tax receipt almost instantly in most cases. One word of caution: donations to U.S. charities are not deductible unless you have some U.S. income to claim them against.
Contribute to an RESP. Dec. 31 is the cut-off date for 2015 contributions to a Registered Education Savings Plan to qualify for the Canada Education Savings Grant for this year.
Tax loss selling. If you have any taxable capital gains for this year, you might think about selling some losers to offset them. For Canadian securities, you need to put in the sell order by Dec. 24 to ensure the trade settles this year. Remember that you cannot buy back the same security within 30 days to avoid the Canada Revenue Agency’s superficial loss rule.
Installment payments. If you’re required to pay tax by installments, your final payment for 2015 is due by Dec. 15. If you’re late, the CRA may charge interest. Check to ensure you made all your earlier payments on time (March 15, June 15, and Sept. 15). If you missed any, pay them now to minimize penalty interest.
And now, back to shopping.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca