TAX UPFRONT

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It’ s time for year-end tax planning

As year-end approaches, now is the perfect time to reach out to your clients and suggest that they may want to take advantage of some common, and perhaps lesserknown, tax planning opportunities that may be available before December 31.

INVESTORS

While 2021 has been a great year for most markets, your client may be holding the odd stock that may be down in value. Tax-loss selling involves selling investments with accrued losses to offset capital gains realized elsewhere in the portfolio. For 2021, the trade date must be no later than December 29 to complete settlement by December 31. If your client purchased securities in a foreign currency, the gain or loss may be larger or smaller than anticipated once the foreign exchange component is taken into account.

Of course, we need to be mindful of the “ superficial loss ” rules if the client plans to repurchase a security sold at a loss. The superficial loss rules apply if property is repurchased within 30 days and is still held on the 30th day by the individual or an “ affiliated person, ” which includes a spouse, partner, controlled corporation, and even a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund, and Tax-Free Savings Account (TFSA). If the superficial loss rule applies, the capital loss will be added to the adjusted cost base of the repurchased security and any benefit of the capital loss can only be obtained when the repurchased security is ultimately sold.

FAMILIES WITH STUDENTS

One of the benefits of setting up a Registered Education Savings Plan (RESP) is the ability to collect Canada Education Savings Grants (CESGs) equal to 20% of the first $2,500 of annual contributions per child or $500 annually, with a $7,200 lifetime limit. If your client’ s (grand)child turned 15 this year and has never been a beneficiary of an RESP, no CESG can be obtained in future years unless at least $2,000 is contributed to an RESP by the end of the year. You may wish to remind your clients of the importance of making a contribution by December 31.

When it comes to RESP withdrawals, if an RESP beneficiary attended post-secondary school in 2021, you may wish to consider having Educational Assistance Payments (EAPs) made from the RESPs before the end of the year to take advantage of the student’ s basic personal amount and tuition credits. Note, however, that if the student finished school in 2021, EAPs can only be paid out for up to six months after the student has left the school.

CHARITABLE GIVING

For donations up to $200 in a year, the federal donation credit is 15% of the donation amount. For total donations exceeding $200 in a year, the federal donation credit jumps to 29% (33% to the extent taxable income exceeds $216,511 in 2021) of the donation amount. Provincial donation credits are also available and the total credit may be up to 54% for total annual donations that exceed the $200 in a calendar year. December 31 is the last day to make a donation for 2021.

With soaring stock markets in 2021, gifting publicly-traded securities with accrued capital gains “in-kind” to a registered charity or a foundation (perhaps via a donor advised fund) may be the way to go this year. Doing so not only entitles the donor to a tax receipt for the fair market value of the security being donated, it eliminates capital gains tax, too.

POTENTIAL CHANGES TO TAX RATES

Some tax measures were proposed during the 2021 federal election that, if implemented, may increase future taxes. For example, the Liberals ’ proposal to tax residential properties held for less than one year could result in tax payable on a principal residence if a home is sold within the first year.

It’ s also possible that the NDP might persuade the minority Liberal government to implement some of the NDP election promises, such as increasing the top marginal tax rate by 2% to 35% (from 33%) or increasing the inclusion rate for capital gains to 75% from 50%. Clients who fear an increase in taxes in 2022 may wish to consider realizing income in 2021, where practicable, before any new measures that could increase taxes may come into effect.

INCORPORATED BUSINESS OWNERS

Finally, if you have clients that have an operating company or professional corporation with a December 31 year end, consideration should be giving to the optimal compensation mix for 2021. A corporation may distribute its income to the owner/manager (as a shareholder and employee of the corporation) either as salary or dividends. As a general rule of thumb, if the business owner needs funds from the corporation, perhaps to pay personal living expenses, consideration should be given to distributing salary (or bonus) to create RRSP contribution room for next year. Receiving salary of up to $162,278 in 2021 would create RRSP contribution room in 2022 of up to $29,210 (the 2022 maximum).

Business owners who do not need funds from the corporation to live on may still wish to withdraw sufficient funds to maximize contributions to RRSPs and TFSAs, which may yield more after-tax investment income than leaving the funds in the corporation for investing.

JAMIE GOLOMBEK, CPA, CA, CFP, CLU, TEP, is the managing director, tax & estate planning with CIBC Private Wealth in Toronto. He can be reached at Jamie.Golombek@cibc.com.

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