RRSP Deadline is March 1, 2018. How much tax can you save?

RRSP Deadline: March 1, 2018

The deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2017 tax filing year is March 1, 2018. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.

If you want to see how much tax you can save, enter your details below!

Do you REALLY need life insurance?

You most likely do, but the more important question is, ‘What kind?’ Whether you’re a young professional starting out, a devoted parent or a successful CEO, securing a life insurance policy is probably one of the most important decisions you will have to make in your adult life. Most people would agree that having financial safety nets in place is a good way to make sure that your loved ones will be taken care of when you pass away. Insurance can also help support your financial obligations and even take care of your estate liabilities. The tricky part, however, is figuring out what kind of life insurance best suits your goals and needs. This quick guide will help you decide what life insurance policy is best for you, depending on who needs to benefit from it and how long you’ll need it. 

Permanent or Term? 

Life insurance can be classified into two principal types: permanent or term. Both have different strengths and weaknesses, depending on what you aim to achieve with your life insurance policy. 

Term life insurance provides death benefits for a limited amount of time, usually for a fixed number of years. Let’s say you get a 30-year term. This means you’ll only pay for each year of those 30 years. If you die before the 30-year period, then your beneficiaries shall receive the death benefits they are entitled to. After the period, the insurance shall expire. You will no longer need to pay premiums, and your beneficiaries will no longer be entitled to any benefits.

Term life insurance is right for you if you are: 

  • The family breadwinner. Death benefits will replace your income for the years that you will have been working, in order to support your family’s needs.
  • A stay-at-home parent. You can set your insurance policy term to cover the years that your child will need financial support, especially for things that you would normally provide as a stay-at-home parent, such as childcare services.
  • A divorced parent. Insurance can cover the cost of child support, and the term can be set depending on how long you need to make support payments.
  • A mortgagor. If you are a homeowner with a mortgage, you can set up your term insurance to cover the years that you have to make payments. This way, your family won’t have to worry about losing their home.
  • A debtor with a co-signed debt. If you have credit card debt or student loans, a term life insurance policy can cover your debt payments. The term can be set to run for the duration of the payments. 
  • A business owner. If you’re a business owner, you may need either a term or permanent life insurance, depending on your needs. If you’re primarily concerned with paying off business debts, then a term life insurance may be your best option. 

Unlike term life insurance, a permanent life insurance does not expire. This means that your beneficiaries can receive death benefits no matter when you die. Aside from death benefits, a permanent life insurance policy can also double as a savings plan. A certain portion of your premiums can build cash value, which you may “withdraw” or borrow for future needs. You can do well with a permanent life insurance policy if you: 

  • …Have a special needs child. As a special needs child will most likely need support for health care and other expenses even as they enter adulthood. Your permanent life insurance can provide them with death benefits any time within their lifetime.
  • …Want to leave something for your loved ones. Regardless of your net worth, permanent life insurance will make sure that your beneficiaries receive what they are entitled to. If you have a high net worth, permanent life insurance can take care of estate taxes. Otherwise, they will still get even a small inheritance through death benefits.
  • …Want to make sure that your funeral expenses are covered. Final expense insurance can provide coverage for funeral expenses for smaller premiums.
  • …Have maximized your retirement plans. As permanent life insurance may also come with a savings component, this can also be used to help you out during retirement.
  • …Own a business. As mentioned earlier, business owners may need either permanent or term, depending on their needs.

A permanent insurance policy can help pay off estate taxes, so that the successors can inherit the business worry-free. Different people have different financial needs, so there is no one-sized-fits-all approach to choosing the right insurance policy for you. Talk to us now, and find out how a permanent or term life insurance can best give you security and peace of mind.

 

Families: 2017 Year End Tax Tips

Calculating and figuring out how much tax you have to pay is nobody’s favorite time of the year, but if you plan carefully there are many tactics available at your disposal to make sure that your tax bill is not more than it has to be in 2017. Which tactics make the most sense can be figured out by analyzing your current finances, estimating your tax situations and identifying the financial transaction that might take place either this year or next year. You should get started now, and consider these tax tips before Dec. 31, 2017.

Make a loan to your family member/Family income splitting

You can set yourself for tax savings in 2018 by making a loan to your lower-income spouse, family members or family trust so that he or she can pay the tax on any investment income on these dollars going forward. To avoid the attribution rules, you will need to charge the prescribed rate of interest on the loan. Until Dec. 31 the rate is 1% and can be locked at this rate indefinitely. Your family member will have to pay the interest on the investment by Jan. 30 each year, for the previous year’s interest charge. You will have to report the interest on this investment and your spouse can claim a deduction for it. You can come out ahead as a family, if your family member earns more than 1 percent annually on the investments.

Lend money for a TFSA contribution

In a TFSA account, all dividends, interests and capitals gains your investments make are tax-free. This is a huge advantage because as you continue to reinvest dividends and interest, the compounding income will also be tax-free. So before Dec. 31 consider lending money to your spouse or adult child to contribute towards his or her TFSA. The contribution limit to a TFSA for 2017 is $5,500, and up to $52,000 in total if you have been 18 or older since 2009 when TFSA was introduced, and you haven’t contributed yet. The attribution rules won’t apply to TFSAs since there is no taxable income, as long as the money remains in the plan. 

Tax Loss Selling

If you own investments with unrealized capital losses, consider selling them before year end to realize the loss and apply it against any of the net capital gains you have realized during the year or in the prior three years. If you intend on doing this, consider completing all trades prior to December 22, 2017.

Invest the Canada Child Benefit in your child’s name

Canada Child benefit (CCB) was introduced in 2016 and provides a meaningful payment to many families on a monthly basis. CCB is a tax-free monthly payment made to eligible families to help them with a cost of raising children under the age of 18. The benefit payments are recalculated every year in July based on the income tax and benefit return information of the previous year. Consider investing these dollars in your child’s name, in an in-trust account. The attribution rules will not be applied to the income and growth of these dollars, as they can be reported in the hands of your child, generally facing little or no tax. This strategy can allow the funds to compound at a much faster rate.

Utilize first-time home buyer incentives

If you purchased your first home in 2017, or plan to buy a place before Oct. 1, 2018, You should consider making a withdrawal of up to $25,000 from your registered retirement savings plan (RRSP) before Dec. 31, under the home buyers’ plan. The withdrawals can be made tax-free if you qualify, even though you will have to repay the withdrawal amount over a 15-year period. The withdrawals under Home buyers’ plan must normally be made in a single calendar year. You may also qualify for the first time home buyers’ credit i.e. a maximum of $750 (and if you live in Saskatchewan you may be entitled to an additional provincial credit of up to $1100.)

Utilize the Lifelong Learning Plan

The lifelong learning plan (LLP) allows you to withdraw amounts from your RRSP to finance full-time training or education (or part-time if you have a disability) for yourself and your spouse or common-law partner. Consider making a withdrawal before Dec. 31, you are entitled to withdraw up to $10,000 annually or $20,000 in total from LLP. You will have to repay the withdrawal amount over time.

Have you maximized your RRSP Contributions or is it time to wind-up your RRSP?

Technically, you have until March 1, 2018 to make your RRSP contribution for 2017, however if you turned 71 in 2017 and need to wind up your RRSP, remember you only have until December 31, 2017 to make a contribution to your RRSP for 2017, not March 1, 2018.

Evaluate your estate plans for non-resident children

You should revisit your estate planning if your children are not currently residing in Canada, and particularly if they plan to remain non-residents long term. Consider adjusting your will or other planning for non-resident children and plan it together with your kids.

Consider tax changes south of the border

If you are a U.S. citizen residing in Canada, you should be alert to any proposed taxed changes in U.S which can affect your tax planning heading into next year. President Donald Trump’s tax proposals include reducing the number of tax brackets and increasing the dollar thresholds where the rates apply, increasing the standard deduction, eliminating the deduction for medical costs and state and local taxes, and eliminating the alternative minimum tax, among other things.

Consider talking to us prior to year end if you would like to act on any of these tips.

Payments due by December 31, 2017

●     RESP Contributions

●     Charitable gifts

●     Contribution to your RRSP if you turned 71 during 2017 (you will also have to wind up your RRSP by this date.)

●     Medical Expenses

●     Union and professional membership dues

●     Investment counsel fees, interest and other investment expenses

●     Political contributions

●     Deductible legal fees

●     Interest on student loans

●     Certain child/spousal support payments

Business Owners: 2017 Year End Tax Tips

The end of the year provides a great opportunity for business owners to consider ways to improve their tax position. As a business owner, there’s still time to manage taxes for yourself and your business for 2017 before the end of the year. It is particularly important this year that you consider year-end tax planning keeping in mind the government’s private company tax proposal which may result in increased taxes in 2018 for private companies and their shareholders.

New tax rules for private companies are on their way

While you carry out your review this year, keep in mind that in 2018 the way private companies and their shareholders are taxed will be changing. In the summer of 2017, Finance Minister Bill Morneau released a number of tax proposals for small businesses, which have since been updated in October 2017. The updated reforms include changes to the “reasonable test” for income splitting/sprinkling and passive investments inside of a private corporation,

As a business owner, you should be aware of how these changes will affect your company and your financial situation. Please set up a meeting with us and your tax advisor before the end of the year to review how these changes will affect your situation.

Effective Dividend/Salary Mix

You can receive corporate income as salary or dividends as the owner of an incorporated business. Deciding on what’s best for you this year, you must analyze the optimal mix of salary and dividends for you, which depends on several factors including:

  • Your cash flow needs (current and future)
  • Your income level
  • Payroll taxes on salary
  • The corporation’s income level
  • The possible effects of the private company proposals on you and your company.

You may want to pay yourself enough salary to contribute as much as you possibly can towards an RRSP. The same goes for any family member employed by you. The maximum contribution you can make is 18% of the previous year’s earned income, up to a limit of $26,010 for 2017 and $26,230 for 2018. Keep in mind that the salary paid must be reasonable for your company to get a tax deduction.

The downside to this, is that if your business is in a situation where you can suffer from economic downturn, then paying out a big salary in a profitable year will reduce the likelihood of recovering corporate taxes paid, if a loss materializes.

Family employment – Paying a salary to your family

You may want to consider employing your family members and paying them an appropriate salary if they provide services to your incorporated business. The business will benefit from a tax deduction on the salary paid, as long as it is reasonable in light of the services they provide (Example: administrative work, bookkeeping, acting director). Usually, a salary is considered “reasonable” if the services are genuinely being provided and the salary is similar to arms’ length comparables. Remember to weigh in the costs of payroll taxes and CPP contributions against the potential tax savings.

Family members who hold shares in your company

Consider paying additional dividends in 2017 to your family members who hold shares in your company, before the new tax on split income regime comes into effect in 2018. If the dividends amount these individuals receive is “unreasonable” under the circumstances, they will be taxed at the top marginal tax rate (regardless of their own personal tax rate).

The new proposed rules are targeted at family members aged 18-24. The “reasonableness test” examines labour and capital contributions to the business, risk assumed and previous remuneration.

You should review your tax situation with your tax advisor including your family company’s organizational structure on a go-forward basis to ensure you satisfy the new “reasonableness test”.

Does the small business deduction affect you?

Can your business claim a small business deduction? The current small business deduction is $500,000. The small business tax deduction will be worth more to your company this year than it will be in 2018, because the small business tax rate will be decreasing from 10.5% in 2017 to 10% in 2018 and will be down to 9% in 2019.

If your corporate group claimed more than one small business deduction, the 2016 federal budget introduced several changes which were intended to limit the multiplication of the small business deduction through the use of certain partnerships and corporations. Please review this with your tax advisor.

When to pay dividends: 2017 or 2018?

Deciding if to pay dividends in 2017 or 2018, consider that the income tax rate for non-eligible dividends (generally, dividends that are paid from a company’s income that were taxed at the small business tax rate or as interest income) is increasing slightly in 2018. The federal tax rate is going up 0.34% from 26.30% in 2017 to 26.64% in 2018. A non-eligible dividend of, say, $100,000 out of your company in 2018 can save you at least $340 in absolute tax savings if paid in 2017 instead. These savings can be even higher if the provinces also announce increases to their 2018 tax rates for non-eligible dividends. The following provinces have announced increases: Ontario, New Brunswick and British Columbia.

Please also note that the top personal rate is also increasing.

Are you affected by the new passive income tax regime?

The rules being introduced by the government in 2018 can potentially eliminate the financial advantages of investing passively through a private corporation. As a result of these rules, it will soon become less beneficial to earn investment income in a company and distribute non-eligible dividends, than it will be to earn investment income personally. More details are expected to be announced in the Federal Budget 2018. The government made an announcement on October 18, 2017, that passive investment income below a $50,000 annual would face no tax increase and confirmed that the new rules would apply on a “go-forward basis”. According to the government this $50,000 threshold is intended to allow you to build up passive investments to help cover things like income fluctuations, start-up costs or maternity leave. The government has also stated that passive investments that have already been made by private corporations’ owners will be “protected” (this includes future income earned from these investments). There is still clarification required on when these rules will take effect and how the government intends to implement these new rules.

This is in an imperative year to do a year-end review of your personal and business finances. Talk to us, we can help.

Accessing your Retained Earnings

One of the financial planning issues that business owners face is how to access their corporate earnings in a tax efficient way. 

There are 5 standard methods: 

  • Salary
  • Dividend
  • Shareholder Loans
  • Transfer Personal Assets
  • Income Splitting

There are also unique ways utilizing life insurance and critical illness insurance to access your retained earnings. Please contact us to learn how we can get more money in your pocket. 

Updated Small Business Tax Reforms

It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference: 

  • The government intends to honor a commitment made prior to the election, to reduce the small business tax rate from 10.5% to 9% by the year 2019. 
  • Morneau confirmed that the government has scrapped the proposal to limit access to the Lifetime Capital Gains Exemption. 
  • The plans announced earlier in the year to reduce the value of passive investments made by corporations will continue in principle, but with few key changes. There will be a threshold of $50,000 of income per year, which will be excluded from the newly set higher rate of tax. 
  • The government has agreed to “simplify” the rules related to the new plans, to prevent income splitting for family members, who are not active in a business, but the plan will still move ahead in principle. 
  • Morneau has confirmed that the government will still provide good entrepreneurial incentives for venture capitalists and angel investors. The criteria for which still needs to be established. 
  • The proposed rules to limit the conversion of income to capital gains have been abandoned due to the concerns that many related to intergenerational transfers and insurance policies were held inside corporations. 

Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us. 

Old Age Security

If you’re in a situation where you could be losing some of your OAS benefit, you may want to consider the following strategies to help minimize your loss. In our most recent blog post, we outline 8 strategies on how to minimize OAS Clawback. Please always consult us prior to implementing any of these strategies to ensure this makes sense in your situation. Before age 65, use some of your RRSPs

  • Income Splitting
  • Defer Old Age Security
  • Tax Efficient Non Registered Investments
  • Tax Free Savings Account
  • Dividend Income
  • Leveraged Investing
  • Capital Gains Dispositions after age 65

Talk to us, we can help. 

A Summary of Proposed Tax Changes in 2017

The month of July saw a set of proposed tax changes announced by the Federal Minister of Canada which are potentially the most impactful and significant amendments since the large-scale tax reform of 1972. We will go on to describe the detail and impact of the proposals, which fall into three main areas, below. In summary, however, the purpose of the changes introduced by the government is broadly to close the potential current perceived tax loopholes that exist for higher earners and owners of private corporations. In response to the proposals, the government is inviting views and opinions on the changes during a consultation period which will last until October 2 2017.

  1. Changes to Income Sprinkling

If a high earning individual moves a proportion of their income to a family member such as children or a spouse who hold a lower tax rate in an attempt to reduce the total amount of tax payable, this is known as income sprinkling. To mitigate this, the government is proposing to include adult children in the eligibility rules in addition to minors, as well as taking a “reasonability” approach to assessing their income and thus which rate the transferred income should be taxed at. This will mark a change to the current TOSI (tax on split income) rules which currently apply.

2.  Minimizing the incentives of keeping passive investments in CCPCs

Currently, it can be advantageous for corporations to keep excess funds in a CCPC due to the fact that the corporate tax rate on the first $500,000 of taxable income is often much lower than the tax that would be payable by an individual. The government is moving to make this option less beneficial by the following two initiatives: firstly, by the removal of the option of crediting the capital dividend account (known as the CDA) equal to the amount of the non-taxable portion of any capital gains and secondly by removing the refundability of passive investment taxes.

3.  Reducing the transfer of corporate surpluses to capital gains

Tax advantages can currently be achieved by the sharing out of corporate surpluses to shareholders through dividends or salaries, which are often taxed at a lower rate than if earned as personal income. This is due to the fact that just 50% of capital gains are taxable.

These are the first significant proposals since 1972, talk to us we can help. If these changes are of concern to you or your client, please send an email to Fin.consultation.fin@canada.ca or send an email to your local member of parliament.