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Tackle taxes before the rules change

Proper year-end tax planning is especially important today, as Liberal government changes could impact how much your client hands over to the taxman in the future.


Date: November 26,2015

On December 3, the Canadian Parliament is set to convene under the new Trudeau government for the first time. One of the top items on the agenda? Changing parts of our tax code.

Most experts expect the Liberals to fulfill their campaign promise of lowering the 2016 federal tax rate from 22 per cent to 20.5 per cent for the middle-income tax bracket, and increase the rate from 29 per cent to 33 per cent for individuals earning more than $200,000 annually.

Since it’s highly likely that these changes will be enacted, Canadians should act now to prepare for a new tax future, says Peter Bowen, Vice-President, Tax and Retirement Research, at Fidelity Investments Canada.

Understanding income

Come next year, middle-income earners will pay less tax. If your clients fall into this category, then consider having them defer taking certain types of taxable income, like a year-end bonus, until 2016.

Of course, make sure that the bonus doesn’t push them into a higher category, but if it doesn’t, “then it’s an easy step that might be able to save some tax,” says Mr. Bowen.

As for the higher-income earner who will have to pay more tax in 2016, a move in the opposite direction will be more beneficial.

“Those individuals should be thinking about it completely differently,” says Mr. Bowen. “They should be looking to accelerate income in 2015, such as receiving a bonus early, or maybe selling assets before the end of the year.”

He also notes that taxes on non-eligible dividends are going up next year as well, by roughly five per cent depending on the province. If a client has a holding company, consider paying out his or her dividend before December 31, suggests Mr. Bowen.

Considering RRSP contributions

Those who aren’t impacted by the tax increase should approach RRSP season as they always do – invest as early as you can and deduct your contribution against 2015 income, says Mr. Bowen.

If your client is in the highest tax bracket, though, he or she should still invest now, but claim the deduction against the income on the 2016 tax return, he says.

“The strategy can save almost $1,000 in taxes,” he explains.

Exercising employee stock options

Another tax-related Liberal campaign promise that may impact some clients relates to a possible new cap on stock options. In its platform, the Liberals promised to cap the amount one can claim under the employee stock option deduction at $100,000.

If someone does have options that can be triggered, do it now, says Cory Papineau, a Winnipeg-based financial advisor.

“With a tax increase of up to four per cent (for the wealthiest Canadians) and a potential cap on the tax benefits of stock options, it would be beneficial for the holders of ‘in the money’ options to trigger them as soon as possible,” he says.

Going forward, the capping of the benefit will diminish stock options’ usefulness as a deferral of income, he adds.

The change will also impact existing retirement planning strategies for individuals who have held onto their options to average out their draws and tax liabilities, says Mr. Papineau.

“They will need to consider that their tax costs on income of more than $100,000 earned from the sale of stock options will be taxed at their maximum tax rate in future years,” he warns.

Dealing with donations

Those who will see their marginal tax rate rise next year may also want to consider holding off on donating to a charity until 2016. While Mr. Papineau doesn’t want to see charitable giving impacted by tax changes, when you look at the math, it will help to wait, as donations can help reduce taxable income.

In general, though, charitable giving does offer significant tax benefits, especially when it comes to donating securities. If a client donates shares or investments in mutual funds to a charity, the capital-gains inclusion rate is zero rather than 50 per cent, Mr. Bowen points out.

“You don’t pay any capital-gains tax, but you still get the full donation receipt for the value of the security donated,” he says.

Tackling TFSAs

There’s one more change that Canadians need to keep in mind: It’s possible that the Liberals will reduce the TFSA contribution limit from $10,000 back to $5,500.

In the event that this does happen, Canadians should contribute as much as they can, up to the $10,000 limit, in 2015. It’s not clear what will happen for 2016, but you don’t want to get caught by a lower limit, says Mr. Bowen.

As a general rule, it’s better to withdraw money from a TFSA before the end of the year rather than early the following year, because you can’t add that money back into the account until the year after the withdrawal. Since the tax year resets on January 1, your client will be able to add those dollars back after the New Year, says Mr. Bowen.

With only a few weeks left in 2015, now’s the time to talk to clients about their tax-related needs. It’s likely that tax changes are coming, so maximize any potential tax savings as soon as possible.

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