YEAR-END TAX PLANNING IDEAS
WOULD YOU LIKE SOME TAX-FREE INCOME?
AROUND THE COURTS
YEAR-END TAX PLANNING IDEAS calculated at the highest marginal rate. If
your taxable income for 2006 (after all
It’s December, and time to think of some tax deductions) exceeds $118,286, the charitable
planning ideas. If you wait until your tax donations credit is worth the same as a
return is due next April or June, it will deduction. If your taxable income is lower,
generally be too late to change your tax then the donations credit is better than a
situation for this year. deduction.
Below, in no particular order, are some ideas In British Columbia, for example, if you
and tips which may be useful to you before have $70,000 of taxable income, additional
year-end. income is taxed at 31.15%, while each dollar
of charitable donation saves you 43.7%.
1. Charitable Donations
In fact, if you are not in the top tax bracket,
Charitable donations have to be made by you can benefit by receiving income and
December 31 to be counted for this year. donating the excess to a charity. This may be
possible if you already volunteer for a
Charitable donations receive special tax charity. If the charity pays you for your
assistance. Once your donations exceed $200 volunteer work, and you donate the income
per year, they give you a tax credit
back to the charity, your tax bill will go current fair market value. If you are
down. considering making a donation to a charity,
and you have some securities that have gone
For example, suppose you are in the 31% up in value, donating the securities will be
tax bracket in British Columbia and you have very tax effective.
already made over $200 in donations this
year. If the charity pays you $10,000 for
work you have done for it, your tax bill will
go up $3,115. If you donate the same
$10,000 back to the charity, your tax bill
will go down $4,370. The net is a saving of
$1,255 after tax. (The numbers in other
provinces will differ slightly, but the same
principle applies generally.)
Of course, the income has to represent real
work you have done for the charity, and
your donation must be voluntary. The
charity also has to determine whether you
are an employee or an independent
contractor. If you are an employee, the
charity must issue you a T4 and may have
to withhold some tax at source. If you are an
independent contractor, you may be able to
deduct expenses from your “business
income”, providing you with further tax
savings. Professional advice may be useful in
making this determination.
An even simpler route is to have the charity
reimburse you for expenses you incur as a
volunteer (e.g., travel and parking costs).
Such reimbursements, provided they are
reasonable, are not taxable to you. You can
then donate the reimbursed amount back to
the charity and get a tax credit.
Another idea to consider is donating publicly-
traded shares or mutual fund units to a
charity. If you do this, you do not report
any capital gain on the securities, but the
donation is valued for tax purposes at its
You can claim charitable donations up to 2005. The new rules provide an enhanced
75% of your “net income” for tax purposes. Dividend Tax Credit on dividends paid by a
Net income is basically your income after public corporation. The enhanced credit also
most deductions, but before claiming the applies to dividends from a Canadian-
capital gains deduction (capital gains controlled private corporation that has paid
exemption) or any loss carryovers from tax at the high corporate rate (beyond the
other years. level where the small business deduction
Note that, under rules announced in
December 2003 but not yet enacted into law, (As noted in our September 2006 issue, draft
donations of property are valued at your legislation to implement these changes was
cost of the property, if you acquired the released on June 29, 2006. The legislation
property within the past 3 years or if you has now been included in Bill C-28, which is
acquired it for the purpose of donating it. expected to be passed by Parliament this
This latter “purpose” rule applies only if month.)
you acquired the property within the last
10 years. (This rule does not apply to A Canadian-controlled private corporation
publicly-traded securities or certain other that has paid tax above the small business
property.) This prevents the so-called “art deduction level in recent years will have a
flip” schemes which used to attract many General Rate Income Pool, or “GRIP”. This
taxpayers, who would purchase art for less pool can be used to pay you dividends for
than its appraised value and then donate the which you will receive the enhanced
art to a charity for a high-value tax receipt. dividend tax credit, so that your tax cost of
the dividend goes down.
2. Owner-manager remuneration
Regular dividends are included in your
If you own a small business that is income with a 25% gross-up (i.e., 125% of
incorporated and has a December 31 year- the dividend is included in your income).
end, you will want to make year-end The federal dividend tax credit is then 2/3 of
decisions about paying yourself (or family the gross-up, and there is a provincial credit
members) a bonus to reduce the corporation’s as well. For dividends from a public
income. Traditionally, private corporations corporation, or from a private corporation’s
have “bonused out” their income over the GRIP, the income inclusion is 145% of the
small business deduction threshold, which is dividend, and the federal dividend tax credit
$300,000 until the end of 2006 (it becomes is 11/18ths of the 45% gross-up, and again
$400,000 in 2007). there is a provincial credit. While the
numbers can be confusing, the net effect is to
The calculation changes somewhat this year reduce substantially the tax you pay on such
because dividends from income taxed at the dividends.
high rate will now be taxed at a lower rate in
your hands, due to the new rules on the The precise calculations and decisions about
taxation of dividends announced in November owner-manager remuneration will need to
take into account provincial tax, the Agency (CRA) after you filed your 2005
provincial dividend tax credit, your other return in the spring of 2006. Your maximum
sources of income, how soon you need to contribution room for 2006 is:
extract the funds, future changes in personal
and corporate tax rates, the corporation’s 18% of your 2005 earned income
need to retain cash in the business, and other (maximum $18,000 if your 2005 earned
considerations. Although the calculations can income exceeded $100,000)
be complex, it is worth paying attention to minus
this issue before year-end. your pension adjustment
3. RRSP contributions any contribution room from earlier years
If either you or your spouse are not yet 69 that you have not yet used up.
this year, then you can normally make
contributions to a registered retirement savings Your deadline for contributions for 2006 is
plan (RRSP) and deduct them from your March 1, 2007. However, if you have any
income for tax purposes. Your RRSP excess cash you should consider planning for
contribution limit for 2006 is based on your your 2007 contribution as well. You can
2005 “earned income” as well as your make that contribution any time after
pension adjustment (reflecting future January 1, 2007. Putting funds into an RRSP
pension credited to you in 2005 from your will allow them to grow tax-free, rather than
being a member of a company pension plan). you having to pay tax on any interest that
“Earned income” is generally your income you earn during the year.
Consider also a contribution to a spousal
• employment RRSP. (This also applies to a common-law
• carrying on business (but not through a partner or same-sex partner even if you are
corporation unless the corporation pays not legally married.) Your maximum deductible
you a salary; dividends or shareholder contribution is the same regardless of whether
benefits are not “earned income”) you contribute to your RRSP or your
• net rental income (after expenses) from spouse’s, or some combination of the two. If
real estate your spouse is likely to have lower income
• CPP disability pension than you in future years, then a spousal
• research grants RRSP contribution will allow your spouse
• taxable spousal or child support payments to take the income out down the road (once
(note that child support is taxable only if the third year has passed from when you
the support order or agreement dates make any spousal contributions). Your
before May 1997). spouse will then pay tax on that income at a
lower rate than you would if you withdrew
Your available RRSP contribution room the funds from your own RRSP.
should be printed on the Notice of Assessment
that you received from the Canada Revenue
A spousal RRSP is also useful if you are 4. Trigger capital losses
already over 69 but your spouse is younger.
Once you reach the year in which you Capital gains are half-taxed; that is, half of
turn 69, you cannot contribute to your own the gain is included in your income as a
RRSP and must convert your RRSP to an taxable capital gain. Capital losses can be
annuity or a registered retirement income claimed only against capital gains (and can be
fund (RRIF) from which you draw income carried back three years and forward
every year. However, you can still make indefinitely against such gains).
contributions to a spousal RRSP if your
spouse is under 69 at year-end. If you have capital gains this year — for
example, from selling some shares for a gain
earlier in the year — you may wish to trigger
capital losses by selling securities that have
gone down in value.
Make sure the transaction is completed in
time for it to settle before the end of the
year. Depending on your broker, the
security and the market on which it is
traded, the settlement date may be from one
day to several days after you instruct your
broker to complete the sale.
You should also ensure that you are not
caught by the “superficial loss” rules. If you
(or an “affiliated person”, which includes a
corporation you control) acquire the same
(or identical) securities within 30 days of
selling them, then your capital loss will be
There are numerous other special rules for
capital gains and losses. This is just a general
5. Pay your instalments
If you have instalments to pay for the year,
and you have not been paying them as per
the notices you receive from the CRA during
the year, now would be a good time to catch
up. If you wait until April, you will owe
four months additional interest, and possibly There are a number of types of income or
penalties, on the late instalments. benefit which are not subject to tax under the
To avoid interest from applying, instalments Income Tax Act. To the extent you can get
should be paid on March 15, June 15, one of these, you won’t need to report the
September 15 and December 15. Prepaid or income or pay tax!
“early” instalments earn credit (called
“offset interest”) against interest that
applies to late instalments for the same year.
You are allowed to calculate instalments
based on any of three methods, without
interest applying. The instalments can total
your tax payable (on income from which tax
is not withheld at source) for this year, or
for last year, or based on the amounts that
the CRA advises you. The CRA’s notice to
you for March and June is based on the
amounts you paid two years ago, and then
for September and December the suggested
instalments are adjusted so that the total for
the year equals the amount you paid last year.
If you have not been paying your
instalments, you should estimate as best as
you can the tax that will be owing for the
year on your self-employment and investment
income (and other sources from which tax is
not withheld). You should then make a
catch-up instalment payment as soon as
possible, to reduce interest charges.
Where interest does apply to late
instalments, it is calculated at 9%,
compounded daily. (The rate changes each
quarter.) You do not get interest on overpaid
instalments, other than as an offset to late
instalments for the same year as explained
WOULD YOU LIKE SOME
Here are some of the kinds of income that
are not taxed, based on the provisions of the • Income of a “status Indian” earned on a
Income Tax Act, CRA Interpretation Bulletins reserve. If you aren’t a status Indian, this
or court decisions: exemption doesn’t help you!
• Strike pay from a union. (Supreme Court • Payments for foster care and similar in-
of Canada, 1990 decision in Fries v. The home care that you provide.
Queen) A union’s cash gift to a member
is also tax-free. • Welfare and similar social assistance
payments. These must be reported as
• Damages or compensation for personal income, but an offsetting deduction is
injury, including structured settlements available when calculating taxable
and awards from a provincial Criminal income.
Injuries Compensation Board.
• Workers’ compensation benefits. These
• Compensation for mental or emotional must be reported as income, but an
damage at the workplace, such as offsetting deduction is available when
harassment of an employee, or for calculating taxable income.
human rights violations.
• Grants under government programs,
• Lottery or other gambling winnings, unless the program has been prescribed
unless you are so organized and active in in the Income Tax Regulations as taxable,
your gambling that it constitutes a or it relates to your business.
“business” from which you could deduct
losses if you lost money. • Reimbursements of expenses to
volunteers, and reimbursements to parents
• Television game show prizes, even for the cost of transporting students to
where the taxpayer trained to develop school when a school board discontinued
expertise in the subject matter. bus service.
• Gifts (provided they are not disguised • Damages for breach of an employment
employment income or business contract before it began.
• Compensation for damage to business
• Capital gains on your principal operations in some circumstances.
residence, subject to various rules that
ensure that your family has only one • U.S. social security disability benefits.
“principal residence” at a time. However,
if you build a home to sell, but move in • Certain employment benefits (see CRA
first, this exemption will not be available guide T4130, available on cra.gc.ca),
because your gain will be business profit, including:
not capital gain.
— your employer paying for — child care provided at the workplace
counselling services related to your for all employees and managed by
mental or physical health the employer
— employer contributions to a private
health care plan such as a drug plan — uniforms required for employees, or
or dental plan special or protective clothing
— employee discounts on merchandise
— employer contributions to a registered and subsidized meals, normally not
pension plan, deferred profit-sharing below the employer’s cost
plan, or disability insurance plan
(when you receive benefits from — social events costing up to $100 per
these plans, you are taxed on them if employee and available to all
your employer made contributions to employees
— transportation passes for bus, rail
— certain allowances, such as reasonable and airline employees (except where
car allowances within certain limits, travelling on a space-confirmed basis).
and travel expense reimbursements
while working away from home AROUND THE COURTS
— two non-cash gifts worth up to $500 Charity must disclose names of donors
per year, and two non-cash awards
worth up to $500 per year, subject The Income Tax Act has rules prohibiting
to certain restrictions CRA auditors from going on “fishing
expeditions” to find information about
— certain benefits for disabled taxpayers.
employees, including transportation,
parking and attendant services Normally, an auditor is entitled to demand
from a taxpayer any information or
— board and lodging at a “special work documentation necessary to determine
site” or a remote location whether the taxpayer has paid the correct
amount of tax.
— items which are considered to
primarily benefit the employer, such If, however, the auditor is looking to find
as cell phones, computers, home information about other taxpayers (not the
Internet service, convention one being audited), the auditor is required to
attendance, professional membership obtain a Court Order from a judge permitting
dues and tuition reimbursement, the auditor to demand information about
depending on the facts “unnamed persons”.
The Courts have been considering the
question of whether the CRA is entitled to
obtain information from charities about their
donors. Charities issue tax receipts which
entitle their donors to substantial tax
In October 2006, the Federal Court of
Appeal issued its decision. A CRA auditor
had obtained a list of donors who had
participated in a particular “forgivable loan”
program that this foundation had operated,
and the CRA had proceeded to reassess the
donors to deny their charitable donation
The Federal Court had ordered that these
reassessments be cancelled because the
auditor had not obtained a Court Order
allowing the auditor to demand information
about unnamed persons. However, the
Federal Court of Appeal overturned this
decision. The Federal Court of Appeal ruled
that the auditor was entitled to obtain this
information in the normal course of the
audit, and that the reassessments of the
donors were valid.
Thus, it is now established that CRA
auditors can demand lists of donors from
charities, and can use those lists to reassess
taxpayers who are considered to have
received excessively high tax receipts.
This letter summarizes recent tax developments and tax
planning opportunities; however, we recommend that you
consult with us before embarking on any of the suggestions
contained in this letter, which are appropriate to your own