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Reduce Your 2013 Personal Tax Bill — Time-Sensitive Tips 

Tax News Flash
Tax News Flash
Tax News Flash

 

Reduce Your 2013 Personal Tax Bill — Time-Sensitive Tips

 

November 15, 2013
No. 2013-37

As a part of your regular personal financial planning exercise, the end of the year is the perfect time to consider ways to improve your financial well-being. There are many time-sensitive steps that you can take before January 1 and early 2014 to help you save on your 2013 personal income taxes. Keep the following tax planning tips and deadlines in mind over the next few weeks as you assess your tax situation for 2013.

 

 

Tax planning review — Top 10 year-end opportunities

 

In addition to looking for last-minute tax savings, the end of the year is also a good time to reassess and review whether you’re achieving the most effective tax savings opportunities for the future. For example, you may want to:

  1. Consider Accelerating Payment of Non-Eligible Dividends Into 2013
  2. Maximize Your Tax-assisted Savings Contributions
  3. Consider Tax Loss Selling
  4. Think About Family Income Splitting
  5. Time Your Payments of Credits and Deductions for 2013 Savings
  6. Reduce the Taxable Benefit for Your Company Car
  7. Catch Up on Deficient Tax Instalments
  8. See if it’s Time to Wind Up Your RRSP
  9. Apply for Early CPP Benefits
  10. Time Your Move to Another Province.

 

 

1. Consider Accelerating Payment of Non-Eligible Dividends Into 2013

 

Due to increases in tax rates on non-eligible dividends in 2014, taxpayers have a limited-time opportunity for absolute tax savings on non-eligible dividend income if dividends are paid out in 2013 instead of 2014. The combined top marginal federal/provincial tax rate on non-eligible dividends will increase in all provinces due to an increase in the federal rate. If you are in the top marginal tax bracket in your province of residence, we expect the tax savings of paying out dividends in 2013 instead of 2014 will range from 1.3% to almost 4.5%, as shown below.

 

Anticipated Tax Savings from Paying Non-Eligible Dividends in 2013 vs. 2014 at Combined Top Marginal Tax Rates

Province

2013

2014

Projected
Tax Savings

British Columbia

33.7%

38.0%

4.3%

Alberta

27.7%

29.9%

2.2%

Saskatchewan

33.3%

35.3%

2.0%

Manitoba

39.2%

40.8%

1.6%

Ontario

 

 

 

    More than $509,000

36.5%

40.1%

3.6%

    Less than $509,001

32.6%

36.5%

3.9%

Quebec

38.5%

39.8%

1.3%

New Brunswick

33.1%

37.5%

4.4%

Nova Scotia

36.2%

39.1%

2.9%

Prince Edward Island

38.6%

40.0%

1.4%

Newfoundland

30.0%

31.6%

1.6%

 

Note that this table takes into account the provincial top marginal tax rate increases in British Columbia and New Brunswick, assumes provincial tax rates will remain the same in Manitoba and Newfoundland in 2014 and projects the provincial top marginal tax rate on non-eligible dividends for six out of the ten provinces (except for Quebec, Manitoba, Ontario and P.E.I., the only provinces so far that have announced changes to the 2014 provincial tax rate for non-eligible dividends).

 

Eligible dividends — If you live in British Columbia and New Brunswick, you may want to consider accelerating the receipt of eligible dividends if possible into 2013. Due to an increase in the top marginal provincial tax rate on general income in these provinces for 2014, you may be able to realize tax savings on eligible dividends of up to 2.9% and 2.4%, respectively, this year.

 

Accelerating income — Higher income taxpayers who live in British Columbia and New Brunswick may see a significant increase in their tax rates for 2014. The B.C. government created a new income tax rate for individuals who earn more than $150,000 a year. These individuals will see their rates increase to 45.8% (from 43.7%) for 2014. As a result, affected higher income taxpayers should consider whether it’s worthwhile accelerating income they expect to receive into 2013 or deferring deductions until 2014, if possible, to realize tax savings of 2.1% in 2013.

 

In the case of New Brunswick, individuals who earn more than $135,055 a year will see their rates increase to 46.8% (from 45.1%) for 2014. As a result, these taxpayers should consider accelerating income they expect to receive into 2013 or deferring deductions until 2014, if possible, to realize tax savings of 1.7% in 2013.

 

2. Maximize Your Tax-assisted Savings Contributions

 

All tax-assisted savings plans can offer significant tax benefits for your investment savings. However, contribution limits and the tax treatment of contributions and withdrawals vary between the plans. Which plans you choose for your savings to earn interest and grow in a tax-free environment will depend on your circumstances. Generally, if you have enough resources, you should invest in all the relevant plans. For many Canadians, the most relevant plans will include Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA). Both these plans can help you save for retirement or other reasons but it’s important to note the differences between them.

 

TFSA contributions You can currently contribute up to $5,500 per year to a TFSA, as long as you are 18 or older and resident in Canada. TFSAs became available in 2009, and if you have made no contributions to date, you can contribute $5,000 for each of 2009, 2010, 2011, and 2012, and $5,500 for 2013, for a total of $25,500. Another $5,500 of new room will become available as of January 1, 2014, bringing the total TFSA contribution room up to at least $31,000 in 2014.

 

TFSAs may also offer an opportunity for income splitting for families in which one spouse has more income than the other. You can give funds to your spouse to contribute to his or her own TFSA, as long as your spouse has available contribution room, and the normal income attribution rules that would tax the investment income in your hands will not apply.

 

RRSP contributions Three factors limit the amount you can contribute to an RRSP: a dollar limit ($23,820 for 2013 and $24,270 for 2014); a percentage of the previous year's "earned income" (18%); and your pension adjustment, which represents the notional value of pension contributions made by you and your employer in the year.  You have until March 3, 2014 to make your 2013 contribution. An RRSP contribution for 2013 of $23,820 would result in tax savings of up to about $11,000 if you are in a top marginal tax bracket of 46%.

 

3. Consider Tax Loss Selling

 

If you own investments with unrealized losses, consider selling them before year-end to realize the loss and apply it against your capital gains realized during the year or in a prior year. You may benefit from this technique, known as tax loss selling, if you realized capital gains in 2013 or you reported taxable capital gains in one or more of the last three years (i.e., 2010, 2011 or 2012).

 

The more capital gains tax you paid in the last three years, the more you should consider the tax advantages of tax loss selling before the end of the year so you can carry back the losses to offset those gains (bearing in mind that tax considerations are only one of many factors that should influence your investment decisions).

 

If you engage in tax loss selling, make sure you don’t run afoul of the special tax rules designed to stop the artificial creation of tax losses. For example, a capital loss will be disallowed if you own or buy a similar property 30 days before or after the sale and if you, your spouse or a corporation you control still holds that similar property 30 days after the tax loss sale.

 

Remember that most stock and bond transactions normally “settle” three business days after the trade is entered. Because weekends and public holidays may affect the determination of “business days”, if you intend to do any last-minute 2013 trades, consider completing all trades before December 25, 2013 and be sure to confirm the settlement date with your broker.

 

4. Think About Family Income Splitting

 

The CRA’s low prescribed interest rate once again offers a great opportunity to enter into income-splitting loan arrangements with family members or a family trust starting in 2014. Although the CRA’s prescribed rate of interest recently rose to 2% for the fourth quarter of 2013, it is expected to return to 1% for the first quarter of 2014. As a result, you should consider waiting until January 1, 2014 to lock in a family loan at this historically low rate and achieve future tax savings.

 

Ordinarily, if you lend funds to your spouse, the attribution rules will apply and any income earned on the lent funds will be taxed in your hands. However, if the loan is governed by a written agreement that stipulates the terms of repayment and an interest rate at least equal to the CRA’s prescribed interest rate at that time, then the attribution rules will not apply, provided your spouse or other family member makes annual interest payments to you on the loan by the following January 30 of each year.

 

By locking in a family loan at the 1% rate in the first quarter of 2014 and by having the family member invest the lent funds at a higher rate, you can shift investment income earned on the lent funds to your spouse or another family member who has little or no other income and thus pays little or no tax. If properly implemented, you can effectively arrange for all investment income earned over 1% to be taxed at the lower-income-earning family member’s tax rate indefinitely.

 

Typically, in an inter-spousal arrangement, the higher-income spouse lends a sum of money to the lower-income spouse. Under a written loan agreement, the lower-income spouse agrees to pay interest at the prescribed rate of 1% (if entered into between January 1 and March 31, 2014). The lower-income spouse invests the borrowed funds and subsequently earns a higher rate, say 3% (to generate tax savings through this strategy, the lower-income spouse must earn a rate of return of greater than 1%).

 

Provided the lower-income spouse makes annual interest payments by the following January 30 of each year, 2% of the income in our example (that is, the difference between the 3% rate of return and the 1% prescribed rate) will be taxed in the hands of the lower-income spouse. In this example, on a $100,000 loan, the amount of income shifted to the lower-income spouse would be $2,000 annually.

 

5. Time Your Payments of Credits and Deductions for 2013 Savings

 

If you plan to make payments that may be eligible for tax deductions or credits on your 2013 income tax return, keep in mind that you’ll need to make many of these payments by December 31, 2013. Other payments due during the first 60 days of 2014 may also be eligible for 2013 tax savings.

 

To benefit from a tax deduction, credit or deferral for the following amounts on your 2013 personal tax return, be sure to pay the amounts or take the required action on time.

 

 

Payments due by December 31, 2013

 

  • Charitable gifts
  • Medical expenses
  • Union and professional membership dues
  • Investment counsel fees, interest and other investment expenses
  • Certain child and spousal support payments
  • Political contributions
  • Deductible legal fees
  • Interest on student loans
  • Contributions to your RRSP if you turned 71 during 2013 (you will also have to wind up your RRSP by this date—see below)
  • Payments eligible for the children's fitness and arts tax credits

 

Payments due by January 30, 2014

 

  • Any interest owed on 2013 intra-family loans (see above)
  • Any interest payable by you on loans from your employer, to reduce your taxable benefit

 

Payments due by February 14, 2014

 

  • Reimbursement of personal car expenses to your employer to reduce your taxable operating benefit from an employer-provided automobile (see below)

 

Payments due by March 3, 2014

 

  • Deductible contributions to your own RRSP or a spousal RRSP; keep in mind that you can contribute a maximum of $23,820 for 2013 (up from $22,970 in 2012), subject to your available contribution room
  • Contributions to federal or provincial labour-sponsored venture capital corporations
  • RRSP repayments under a Home Buyers’ Plan or a Lifelong Learning Plan.

 

6. Reduce the Taxable Benefit for Your Company Car

 

If you drive an automobile provided by your employer, your taxable benefit for your use of the car may be reduced for 2013. The taxable benefit consists of two elements: the standby charge and the operating cost benefit. The standby charge may be reduced if you can show that:

 

  • Your business use of the car is more than 50% of the kilometres driven, and
  • Your personal use of the car is less than 1,667 kilometres per month, or about 20,000 kilometres per year.

 

If you meet both conditions, your employer can reduce your reported standby charge by a percentage equal to your personal-use kilometres driven divided by 20,000 (assuming the car was available to you for the full 12 months). The benefit may be reduced by any reimbursement you made in 2013 for use of the car other than the portion relating to the operating cost.

 

The taxable benefit for operating costs is 27¢ per kilometre of personal use for 2013. If your employer pays any operating costs during the year for your personal use of an employer-provided car and you don’t fully reimburse your employer by the following February 14, the 27¢ rate applies (less any reimbursement that you pay your employer by this date).

 

An alternative calculation is available for the operating cost benefit where your business use of the car exceeds 50%. If you notify your employer in writing by December 31, 2013 that you wish to use this option, the operating cost benefit will be a flat 50% of the standby charge.

 

7. Catch-Up on Deficient Tax Instalments

 

If you are required to pay 2013 personal tax instalments, remember that your final instalment must be paid by December 15, 2013 to avoid interest and penalty charges. If you’re behind on your 2013 instalments, you may be able to reduce or eliminate non-deductible interest and penalties by making a “catch-up” and advance payment now. If you make an extra or early instalment payment, the “contra-interest” rules will apply to offset the non-deductible interest that will otherwise be assessed.

 

8. See if it’s Time to Wind Up Your RRSP

 

If you turn 71 and must wind up your RRSP in 2013, remember that you only have until December 31, 2013 (and not March 1, 2014) to make a contribution to your RRSP for 2013. However, you can continue making deductible contributions to a spousal RRSP until the end of the year in which your spouse turns 71, as long as you have earned income in the previous year or unused RRSP contribution room carried forward from prior years.

 

9. Apply for Early CPP Benefits

 

If you are a new retiree considering receiving early benefits under the Canada Pension Plan (CPP) before you turn 65, you should consider applying for these benefits by the end of 2013. Changes to the CPP that started in 2012 could reduce the benefits you will receive.

 

The early penalty increases to 0.6% per month from the old 0.5% per month, such that individuals that choose to take their pension at age 60 will see their basic amount reduced by 36% (compared to 30%). These amendments are being gradually phased in over five years, starting in 2012.

 

10. Time Your Move to Another Province

 

If you’re planning to move to another province at the end of the year, remember that your province of residence on December 31, 2013 will generally be the province to which you pay your taxes for all of 2013. If you’re moving to a higher-tax province, you may want to delay your move until the new year, if possible. If you’re moving to a lower-tax province, you may want to take up residence there before December 31.

 

We Can Help

 

Tax planning should be an important part of your efforts to get the most out of your financial resources. Though you only have to file your tax return once a year, it’s the tax planning steps you take throughout the year that will help you save money at tax time.

 

Your KPMG adviser can help you review your personal or business tax situation and determine what steps you can take before the year-end and early in the new year to minimize the taxes you’ll pay for 2013. For details, contact your KPMG adviser.

 

 


 

 

Information is current to November 14, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

 

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