The Canada Revenue Agency is preparing to implement some significant changes in 2018. It’s a good idea to review your personal tax situation and also meet with your clients to make sure everyone is up to date on tax time issues such as contributions to Tax Free Savings Accounts and Registered Retirement Savings Plans. Also look at lesser-known tax issues, such as investments and family business matters.
TFSA and RRSP Contributions
The end of the year is always a proper time to check and make sure contributions to Tax Free Savings Accounts or Registered Retirement Savings Plans are at the level you want them to be. Keep in mind the basic distinction that contributions to a TFSA account are not tax-deductible like RRSP contributions, but investment income earned in a TFSA, such as dividends or capital gains, is not usually taxable. The general rule for guiding where you put your savings is this: If you’re in a higher tax bracket when making contributions, and expect to be in a lower tax bracket when you start making withdrawals, then an RRSP is typically more advantageous for tax purposes.
In regard to TFSAs, remind your clients that the total allowable contribution room increases for each year they are over 18 and Canadian residents. Individuals can contribute up to $5,500 to a TFSA for 2017, and as of January 2018, the total cumulative contribution room amount is $57,500.
Also, if you or any of your clients turned 71 in 2017 and need to wind up RRSP contributions, those contributions for 2017 must be made by Dec. 31, 2017. You don’t have until March 1, 2018, as you would if you were eligible to continue RRSP contributions.
Corporate Investment Portfolio Tax Changes
If either you or any of your clients hold passive investments in investment portfolios of private corporations, including your accounting firm, new rules coming in 2018 may substantially change your tax liability. Current regulations allow corporations to accumulate higher after-tax earnings from passive investment portfolios. The new rules for 2018 have not been precisely settled yet but are virtually sure to result in higher tax rates, possibly as high as 70 percent, on passive investments held in private corporation investment portfolios.
The good news is that the government stated in October 2017 that no tax increases would apply to passive income below a designated $50,000 per year threshold. Also, the new rules are set to apply only to new investments made after the rule changes go into effect. Income from previously existing investments will not be affected. For now, it’s just a good idea to begin considering how you or your company may want to change the structure or nature of investments going forward, in light of expecting substantially higher tax rates for the current investment structure.
Benefits for Business Owners Who Receive Salary Compensation
Any clients you have who own incorporated small businesses may want to consider the tax advantages of paying themselves a salary rather than taking compensation from the business through dividends. Being paid a salary offers some practical advantages, including being able to make contributions to an RRSP and earning income eligible for CPP. Receiving compensation by means of a salary also carries a number of other benefits. For instance, if you’re planning to purchase a home, having a set salary usually makes it easier to secure a mortgage loan because dividend income is not considered earned income by lenders.
The possibility of significant taxation changes from one year to the next makes it a good idea to get in the habit of doing a tax-related financial review near the end of each year. This gives you or your clients the opportunity to make last minute adjustments to reduce your tax liability, for the year winding down or the upcoming year.