winter 2013

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Decorations, presents and the tax man

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The holidays are here, presents have to be purchased, decorations put into place and planning is in full force for Christmas parties and family gatherings. Income tax, RRSPs, the selling of shares and incorporation are often the last thing people think about.

By Mr.Chris Humby, Deloitte LLP

The holidays are here and presents have to be purchased, decorations put into place and planning is in full force for Christmas parties and family gatherings. Often income tax, RRSPs, the selling of shares and incorporation are the last thing people think about. However, once given a little thought, individuals could achieve significant tax savings. Consideration should be given to the following items to reduce your tax bill in 2013.

Make donations and payments before January 1st

Charitable donations made on or before December 31st can be claimed on your current year personal tax return. New for 2013, as introduced on March 21, 2013 as part of the Federal Budget, is the first-time donor’s super credit. The donor’s super credit is for individuals who have not claimed a charitable donation tax credit in any taxation year after 2007. The new credit effectively adds 25% to the rates used in the calculation of the charitable donation tax credit on the first $1,000 contributed. The new credit can be claimed once from the 2013 to 2017 taxation years.

Similar to the charitable donation contributions a number of other amounts have to be paid on or before December 31st in order to be claimed on your 2013 return including child care expenses, investment counsel fees and interest, medical expenses, political donations, and tuition fees.

Selling your losses

If non-registered investments have been sold in 2013 or any of the three previous years and a capital gain has occurred, any losses from the sale of investments in 2013 could be used to offset the previous capital gains. Therefore, if non-registered investments in your portfolio currently have accrued losses consideration should be given to selling these investments before the end of the year. However, if you are looking to utilize these losses on your 2013 tax return the investments should be sold by December 24th to ensure that the transaction is recorded and available in 2013. The loss investments should not be reacquired within 30 days of the sale date in order to prevent the loss from being denied.

Contributing to your RRSP

Making contributions to a RRSP for you or for your spouse or common-law partner and claiming the deduction can reduce your 2013 tax. Although March 1, 2014 is the deadline for making contributions for 2013 if you turn 71 during 2013 the deadline to make a final contribution is December 31, 2013. Therefore, if you are turning 71 in 2013 and have unused RRSP contribution room a contribution can be made in 2013 which will reduce your tax on your 2013 personal tax return.

Tips for your business

If your corporation has a December 31st year end or you are self-employed you may want to make any planned capital assets purchases by December 31st. As long as the assets are purchased on or before December 31st and they are available for use at December 31st , capital cost allowance (CCA) can be claimed on the 2013 tax return. For example, if you purchase a computer on or before December 31st you would be able to claim a deduction for a half year worth of tax depreciation.

Consideration should also be given to paying a salary to family members who have worked in the business during the year. The salary should be reasonable and equivalent to the amount that would have been paid to a non-related individual for the same services. If the salary paid is reasonable for the services provided the business will receive a deduction for the amount paid and if the individual receiving the salary has little to no other income the individual will pay tax on the salary at the lowest marginal tax rate.

Is incorporation for you?

Still have not incorporated your practice? Is incorporation for you? Every individual’s situation is different and in some scenarios corporations do not fit the individual’s needs. However, more often than not corporations can provide many benefits. The benefits may include: lower tax rates, deferral of personal tax, income splitting on dividends, and asset protection. These benefits often outweigh the setup costs and yearly costs to maintain the structure.

In Newfoundland and Labrador up to $500,000 of active business income earned by the corporation is taxed at the small business rate of 15%. Therefore, if earnings can be taxed in the corporation the tax deferral based on 2013 tax rates can be up to 27.3% as the top personal tax rate in Newfoundland and Labrador is 42.3%. The funds can then be removed, via dividend, in a future year and taxed at a personal rate that converts the deferral into actual tax savings. Seeing that a significant amount of income tax may be deferred one of the items to consider when deciding whether to incorporate or not is how much of the income generated by the practice is required by the professional to cover living expenses.

Income splitting can often be utilized when the practice is incorporated as the professional’s family can own the non-voting shares of the professional corporation often through a family trust. The income may then be taxed in the hands of family members, via dividends or trust allocations, who have little to no other income and therefore the tax would be significantly lower than if taxed in the hands of the professional. As long as the dividends are paid to family members of the professional who are 18 years of age or older, and in a lower tax bracket, the family overall will end up paying less income tax. An example of the tax savings at work are often seen when the professional uses the family trust to help fund their adult child’s education.

As noted above, incorporation often has many benefits including tax deferral and income splitting. However, time should be taken to consider all of the factors relevant to the particular professional before deciding whether incorporation is the best course of action. With the help of a tax professional the tax savings resulting from incorporation can be significant.

This publication is produced by Deloitte as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.

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