With the election of the Liberal party on October 19th, Canada’s tax landscape is about to change. It is as yet unknown which policies will be adopted and when. The Liberal platform has called for a new tax bracket to apply to income in excess of $200,000. In addition, Trudeau promised to eliminate the income-splitting program, the Family Tax Cut, through which a higher-earning spouse can transfer up to $50,000 of taxable income to a spouse in a lower tax bracket. This saved many of our clients $2,000 on their 2014 personal tax returns. Trudeau also said he would roll back the annual limit for Tax-Free Savings Accounts to $5,500 after the Harper government increased it to $10,000. Below are some general strategies to consider in response to increasing taxes:
TAX TIP Did you know that you cannot deduct the value of your own labour and materials as an expense from your self-employed business income? However, in the case of a corporation, salaries may be deducted if declared on a T4 slip. If you need professional advice about what you can and cannot deduct in your business, please contact us now.
Which tax strategy to use?
Strategy 1: Accept the status quo
The status quo is a strategy. Even if you make no adjustments to compensation, you should consider revising your cash flow projections, personal spending expectations and ongoing earnings. This includes changes in your after tax cash from the expected adjustments to top and middle income tax brackets, and also the increased tax burden as a result of the elimination of the Family Tax Cut credit.
Strategy 2: Accelerating income
While prepaying tax may be counterintuitive, it represents a tax savings opportunity. Some private companies will accrue a bonus at year-end and then pay that bonus approximately six months later. This creates a deferral of the personal tax burden for six months; however, in an escalating tax rate environment, that deferral could come at a cost of 4% incremental Federal tax. By accruing and paying the bonus on December 31, 2015, as opposed to deferring the payment to 2016, the rate of tax is expected to be 4% lower. In effect, paying now instead of in 2016 could potentially generate a 4% return. Another area to consider is your personal investment portfolio and the tax savings that may result from realizing accrued gains on certain securities that you may anticipate selling in 2016. By realizing those gains in 2015 instead of 2016, you could add 2% to your after-tax return.
TAX TIP Did you know that eligible moving expenses may be personally deductible whether you moved out of, or into, Canada? An eligible relocation may be made not only to start a business but also for employment purposes. You must be considered a resident of Canada for tax purposes. Please contact us now for assistance regarding your moving expenses.
Strategy 3: Reduce discretionary deductions
Many deductions available to taxpayers are discretionary. Although the deductions claimed in 2015 are valuable, deferring the deductions until 2016 could create an incremental 4% benefit personally with the potential change in personal tax rates. For example, an RRSP deduction claimed by a taxpayer in the top federal income tax bracket in 2015 could be worth a maximum of 29% in tax savings. Comparatively, claiming that same deduction on the 2016 personal tax return could be worth 33% federally.
Strategy 4: Income deferral and income splitting
With the expected cancellation of the Family Tax Cut credit, which allowed for some degree of income splitting within a family, excellent income splitting tax planning strategies are still available including the use of a family trust.
Given the likely increasing tax rates facing business owners and individuals, now is an opportune time to revisit how your tax affairs are managed. We can help. As your trusted advisor, we are focused on your future – looking ahead to anticipate your needs and aspirations to continue building a prosperous future for you and your family. Our focus is getting you there… and beyond.
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Now more than ever you need our strategic tax consulting, comprehensive business advisory and financial planning services. We also use the most advanced state-of-the-art technology to minimize your income tax liabilities.
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