January heralds the start of the annual panic of gathering up all those documents that we need for the income tax deadline and review with our accounting professionals. Many of us are focused on this while forgetting that good tax planning should happen year-round.
There’s no time like now to get started. Filing our returns is backwards-looking, and there are a few strategies that can be applied retroactively, such as sharing donations and choosing medical expense periods.
But throughout 2017, there is so much that can be done. For example:
- Consider income splitting with family members or with a family trust.
- Maximize RESP contributions for your children or grandchildren.
- Maximize RDSPs for disabled family members to optimize government grants and government bonds.
- Decide between TFSA or RRSP contributions, or choosing to pay down debt.
These are all issues that can be researched and discussed throughout the year, so what better time than the start of 2017 to plan for an entire year of tax optimization?
Key dates: The new year brings with it two early deadlines.
January 30th is the deadline to pay the interest on prescribed-rate loans. These loans typically involve a higher-income family member loaning money to a lower-income spouse. The money is then invested, and the income is taxed at the spouse’s marginal rate. The prescribed interest rate for these loans is 1%, making them quite attractive for wealthy families.
If the interest payment deadline is missed, the spousal loan strategy not only falls apart for last year but it actually falls apart for all future years. To re-start the process, you must sell the investments, pay off the loan, and do a brand-new prescribed-rate loan in 2017 for the strategy to work.
March 1st is the RRSP deadline this year. Be sure to consult a trusted advisor to review your RRSP contribution limits, and to discuss the various options you have for planning for your retirement. Should you be investing in TFSAs instead of RRSPs? The answer hinges on what your marginal tax rate is now compared to when you are retired.
Another deadline this year is that 2017 is the last opportunity for Canadians to claim the First-Time Charitable Donor’s Super Credit, which was introduced in 2013. This allows first time charitable donors to claim an additional 25% federal tax credit. To qualify, neither the individual nor their spouse or partner can have claimed a charitable donation for any year after 2007. Up to $1,000 in donations are eligible for the credit. You can share the claim for the credit with a spouse or common-law partner, but the total combined donations claimed cannot exceed $1,000.
My advice is to be proactive and research tax saving opportunities throughout the year. Every dollar of tax saved is one you can put to good use somewhere else!
Image licensed through Shutterstock