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Advisor SunLife

'Tis the season for tax planning

With changes coming soon, advisors can help individuals and small business owners reduce their tax bills — for 2017 and beyond


Date: December 18, 2017

As 2017 winds down, end-of-year financial planning can bring advantages to clients — particularly when it comes to tax planning.

"Clients will be receptive if you start from a place where as an advisor, you can help them with their tax bills," says Jennifer Poon, director, tax and estate planning, wealth at Sun Life Financial in Toronto. Professional help can be beneficial for individuals, but it's especially important for small business owners, says Ms. Poon, as Canada's tax rules are changing soon.

Advisors touching base with clients at the end of the year should ask whether clients have sold any holdings or changed any other parts of their portfolios on their own during the year, Ms. Poon suggests.

Clients may not realize that before the year runs out, they can "harvest" tax losses by selling stocks or funds that have gone down in value. The losses can be offset against any capital gains the clients may have acquired by selling winning holdings, lowering the amount of profit that is subject to capital gains tax.

Sandra Foster, financial author and president of Headspring Consulting Inc. in Toronto, suggests that investors and their advisors should always have a year-end summary discussion to determine whether or not there are tax harvesting opportunities in a particular year.

Even if losing holdings have not yet been sold, there's time up to the end of the year (Dec. 27, to be precise) to harvest tax losses, she points out.

"Make sure they are aware of the 30-day rule, though," Ms. Foster notes. The Canada Revenue Agency (CRA) will deny the loss as "superficial" if the same shares are repurchased within 30 days of the sale.

Beyond tax-loss harvesting in 2017, Ms. Poon suggests that advisors can also help clients by reminding them of tax-wise financial steps they can take in the new year.

"RRSP and TFSA contributions, for example," she says. "I know a lot of people catch up on their RRSP contributions in the first 60 days of the new year. But it makes more sense to make monthly contributions to both."

The deadline for 2017 registered retirement savings plan (RRSP) contributions is March 1, 2018. For tax-free savings accounts (TFSAs), there is no deadline, but there is an annual limit for 2017 of $5,500. Individuals can also contribute up to the annual limits for years they missed since TFSAs were introduced in 2009.

When it comes to clients that are business owners, they need to be aware of changes to the tax rules planned by the federal government, Ms. Poon says. New proposals by Finance Minister Bill Morneau will make it quite punitive to invest after-tax corporate profits in portfolio investments and for high-earning business owners to "sprinkle" income among family members.

"A lot of business owners pay their spouses and children salaries or dividends," explains Ms. Poon. "For 2017, you may want to consider paying them a bit more, in anticipation of the new rules coming in, and cutting back how much you pay in the future."

Regardless of when the new rules become laws, "it makes sense to go through your tax situation at the end of the year to determine the best way to pay yourself, in terms of how much you'll be taxed," Ms. Poon adds.

Business owners who want to invest after-tax corporate profits for their retirement should also keep in mind that the current taxation will be far less this year than after the new rules take effect.

"If you take after-tax corporate profits and invest them in a portfolio, we currently have mechanisms such as the Refundable Dividends Tax on Hand (RDTOH) and the Capital Dividends Account (CDA) in place to avoid double taxation," Ms. Poon says. "The combined effective tax rates on a portfolio earning interest is currently 56 per cent in Ontario; under the new rules it would go up to 73 per cent."

She notes that the finance department announced in October 2017 that investments made before the new rules come in will still be taxed under the old rules, at significantly lower tax rates. This makes it especially worthwhile to consider reinvesting retained corporate earnings now. The Department of Finance also announced the new measures will not apply to a $50,000 annual threshold on passive income.

On the personal taxation side, Ms. Poon says that the end of the year is the best time for people to withdraw money out of their TFSAs if they need or want to use it soon. TFSA withdrawals from the past year are added back to available contribution room at the beginning of the following year, so you'll have full contribution room for 2018 without worrying about over-contributing and facing penalties.

People approaching retirement should remember that retirement situations are not all alike, Ms. Foster adds, making a year-end discussion between advisors and clients even more crucial.

"Tax planning for one year should not be done without considering the impact it might have on future years, or even your lifetime tax bill," she says.

Advisor SunLife


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