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ANALYSIS: The clock is ticking, and year-end tax planning strategies will soon be a thing of the past. So if you’re looking for ways to pay a little less to the government— and keep a little more money for yourself—you might want to consider the following:
1) If you are a lower-income earner, defer as much of your income until next year when the lower tax rates kick into gear. Alternatively, if you are a higher-income earner, consider taking more income this year to avoid paying more on the higher tax rate next year. I appreciate this is hard for employees, but you might be able to defer a year-end bonus and if you are self-employed you may have a little more flexibility to delay billings until closer to the end of the month and push payments into January.
2) Donate. Charities would sure welcome it and you will feel great doing it. A charitable donation is a great way to take advantage and ramp up your last-minute tax credits. The more you contribute the greater the tax break.
3) Any planned withdrawal from your Tax-Free Savings Account (TFSA) should be done prior to Dec. 31, 2015 to ensure that the withdrawal creates additional contribution room in 2016. If TFSA withdrawals are made in 2015, the contribution room will not be reinstated until next year. It is important to note that if you withdraw funds from your TFSA and re-contribute in the same year, certain over-contribution penalties may apply if there is insufficient contribution room available.
4) You still have time, but think about making your RSP contribution. You can decide to apply a deduction when it makes the most sense to take it. Dec. 31 is the last day for final RRSP contributions for individuals who have turned 71 years of age during 2015. Making a final contribution can benefit individuals who have unused RRSP contribution room remaining. The contribution amount can be deducted against income generated in 2015, thus, reducing the individual’s 2015 overall tax liability.
5) In general, income splitting and tax savings can be achieved for higher income individuals by lending funds at the CRA prescribed interest rate to their spouse, who otherwise earns little to no income. These funds are then used to purchase income producing assets thereby shifting investment income from an individual normally taxed at a higher marginal tax rate to a spouse who is taxed at a lower marginal tax rate. The CRA prescribed interest rate is currently at one per cent until Dec. 31, 2015.
If a loan is implemented prior to the year end, the interest rate will be locked in at one per cent until the loan is fully repaid, even if the prescribed rate increases in the future. For individuals that have previously finalized income splitting loan arrangements with family members, one very important reminder is that the interest payable on these types of income splitting loans must be paid annually by January.
6) Paying a Salary to Family Members - Consider paying a spouse or a child a reasonable salary based on their involvement in your business. The salary should be a reasonable amount considering the type of work performed and should be comparable to what a third party would be paid to perform the same type of service. For individuals who originally had little to no income, the salary paid will be taxed at a lower marginal tax rate. In addition, the salary will be considered earned income and will also generate future RRSP contribution room for each of those individuals.
Just a thought – and who doesn’t want to pay less in taxes?
As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV