November 16, 2012
As another year draws to a close, many Canadians are looking for ways to improve their financial well-being. As a part of your personal financial plan, you should now consider time-sensitive steps that could help you save on your 2012 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 2012.
Tax planning review
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 in:
- Your tax rate
- Your tax-assisted savings strategy
- Your other investments
- Your family tax planning
- Your trust arrangements
- Claiming your credits and deductions
- Special situations.
Your Tax Rate
Higher income taxpayers who live in Ontario and Quebec may see a significant increase in their tax rates for 2013. The Ontario government created a new income tax rate for individuals who earn more than $500,000 a year. These individuals will see their rates increase to 49.5% (from 48.0%) for 2013. The Quebec minority government proposed a new rate of 50% (from 48.2%) for Quebec taxpayers who earn more than $100,000. These proposed Quebec rates are expected to be confirmed in the province’s budget on November 20, 2012
As a result, affected higher income taxpayers should consider whether its worthwhile accelerating income they expect to receive into 2012 or deferring deductions until 2013, if possible. If you’re a business owner and you have a family trust or your children receive dividends or capital gains that are subject to the tax on split income, (the “kiddie tax”), keep in mind that these new top tax rates will apply to the trust’s income and the income splitting tax. To mitigate the effects of this tax increase, business owners may want to consider having their company pay income and dividends in 2012 instead of 2013.
In Ontario, the savings from accelerating income into 2012 can range from 0.8% on capital gains to 2.2% on eligible dividends, as shown below.
In Quebec, the savings from accelerating income into 2012 can range from 0.9% on capital gains to 2.4% on eligible dividends, as shown below.
Your Tax-assisted Savings Strategy
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.
Watch the timing of your TFSA withdrawals and contributions — If you have set up a TFSA and you're planning a withdrawal, consider doing so before the end of 2012 rather than early 2013, as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal.
For example, if you contributed $5,000 in January 2012 (making a total of $20,000 in your TFSA) and you decide to withdraw $4,000 in December 2012 so that you have only $16,000 remaining in your TFSA, you will not be able to re-contribute the $4,000 you withdrew until 2013. At that time, you will be able to re-contribute the $4,000 withdrawal along with your new $5,000 contribution limit for 2013, for a total contribution of $9,000.
If, on the other hand, you withdraw the $4,000 in January 2013, you will have to wait until 2014 to re-contribute this amount.
Maximize your RRSP contribution — Three factors limit the amount you can contribute to an RRSP: a dollar limit ($22,970 for 2012 and $23,820 for 2013); 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 1, 2013 to make your 2012 contribution.
Consider the new RRSP anti-avoidance election due December 31, 2012 — You should review the investments in your RRSP and Registered Retirement Income Fund (RRIF) to determine whether you need to make an important election on or before December 31, 2012. Under anti-avoidance rules introduced in the 2011 federal budget, where your RRSP owns shares of a company and you (and any non-arm’s length person) hold more than 10% of a company's shares directly or in your RRSP, these shares may be considered a “prohibited investment” by the CRA and subject to harsh penalties. The rules provide some transitional relief for investments held by an RRSP or RRIF on March 23, 2011. If you file an election by December 31, 2012 and remove any income earned in that investment by March 31, 2013, then the penalty tax will not apply, but you will pay regular tax on the RRSP withdrawal. Due to the complexity of these anti-avoidance rules, you should speak to your KPMG tax advisor before the end of the year to ensure your RRSP and RRIF are in line with these new requirements.
Your Other Investments
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 2012 or you reported taxable capital gains in one or more of the last three years.
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 2012 trades, consider completing all trades before Christmas and be sure to confirm the settlement date with your broker.
Your Family Tax Planning
Split income by locking in low-interest family loans — The CRA’s current historically low prescribed interest rate creates an opportunity to enter into income-splitting loan arrangements with family members or a family trust. The CRA’s prescribed rate of interest is 1% for the fourth quarter of 2012 and will remain at this historically low 1% rate for the first quarter of 2013. As a result, now may be a good time to lock in a family loan at this 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 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.
Your Trust Arrangements
Review your family trust’s residence — If you have a family trust, the end of the year is a good time to review your trust arrangements to make sure your documentation is up-to-date and you’ve taken any steps possible to save tax for the year.
If your family trust is set up in another country or a province other than the one where you reside, consider reviewing its arrangements in light of a 2010 court decision that indicates a change in the approach to determining where a trust is resident for Canadian tax purposes. For details, contact your KPMG adviser.
Pay income to your trust’s beneficiaries — If you have a discretionary family trust, you may want to take steps before the end of 2012 to either pay income to the trust’s beneficiaries or to ensure that the income is “payable” before December 31 (i.e., the trust can issue a note payable to the beneficiary before year-end).
If your trust is paying income to any beneficiaries who are minors, keep in mind that certain types of dividends, capital gains or trust income received by minors attracts a special “income splitting tax” (sometimes called the “kiddie tax”). If this tax applies, it subjects the income to tax at the top marginal rate instead of the lower rate that would usually apply on income received by a minor.
Confirm trust beneficiaries’ residence —You may want to confirm whether any of your trust’s beneficiaries have changed their residence during the year. If a beneficiary has become a non-resident of Canada, the trust may have withholding tax obligations when it distributes income to that beneficiary. If the beneficiary is resident in the U.S., he or she may have to fulfil U.S. tax reporting requirements for transactions with the trust.
You may be able to take steps to make trust distributions to a non-resident beneficiary as tax-effective as possible. Please contact your KPMG adviser for details.
Claiming Your Credits and Deductions
Keep payments eligible for 2012 tax savings — If you plan to make payments that may be eligible for tax deductions or credits on your 2012 income tax return, keep in mind that you’ll need to make many of these payments by December 31, 2012. Other payments due during the first 60 days of 2013 may also be eligible for 2012 tax savings.
To benefit from a tax deduction, credit or deferral for the following amounts on your 2012 personal tax return, be sure to pay the amounts or take the required action on time.
Payments due by December 31, 2012
- 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 2012 (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, 2013
- Any interest owed on 2012 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, 2013
- 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 1, 2013
- Deductible contributions to your own RRSP or a spousal RRSP; keep in mind that you can contribute a maximum of $22,970 for 2012 (up from $22,450 in 2011), 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.
Wind up your RRSP if you’re 71
— If you turn 71 and must wind up your RRSP in 2012, remember that you only have until December 31, 2012 (and not March 1, 2013) to make a contribution to your RRSP for 2012. 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.
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 2012. Proposed changes to the CPP that start in 2013 could reduce the benefits you will receive.
The early penalty will increase to 0.6% per month from 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%). The proposed amendments will be gradually phased in over five years, starting in 2013.
Moving 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, 2012 will generally be the province to which you pay your taxes for all of 2012. 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.
Employees with company cars — If you drive an automobile provided by your employer, your taxable benefit for your use of the car may be reduced for 2012. 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 2012 for use of the car other than the portion relating to the operating cost.
The taxable benefit for operating costs is 24¢ per kilometre of personal use for 2012. 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 24¢ 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, 2012 that you wish to use this option, the operating cost benefit will be a flat 50% of the standby charge.
Catch-up on deficient instalments — If you are required to pay 2012 personal tax instalments, remember that your final instalment must be paid by December 15, 2012 to avoid interest and penalty charges. If you’re behind on your 2012 instalments, you may be able to reduce or eliminate non-deductible interest and penalties by making a “catch-up” and advance payments 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.
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. KPMG’s Tax Planning for You and Your Family
book can help you make tax planning a year-round activity. The 2013 edition is now available in bookstores across Canada or directly from Carswell Thomson Professional Publishing at 1-800-387-5351.
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 2012. For details, contact your KPMG adviser.
|Download KPMG’s new Tax Hub Canada app |
KPMG’s free Tax Hub Canada App for iPads and Blackberrys provides timely, convenient tax news and tax rates to help you respond to changes in tax rules and regulations. Download the app today.
Information is current to November 16, 2012. 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.
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG member firms around the world have 145,000 professionals, in 152 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
KPMG's Canadian Web site is located at http://www.kpmg.ca/
© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.