Published: March 10, 2020
Last Updated: October 25, 2021
Top 2016 Year End Income Tax Planning Tips by Canadian Tax Lawyer Part 1
Everyone wants to reduce their income tax burden and the year end offers the last chance for tax planning opportunities to lower taxes for this year. Here are our Canadian tax lawyer top tax savings tips to reduce your 2016 taxes. In Part 1 of this article we focus on individual year end income tax planning.
Top Individual Canadian tax lawyer Income Tax Planning Tips
Here are the best tax planning ideas from our Canadian income tax lawyers and advice as to how reduce taxes for Canadian individuals.
Pension Income Splitting
Canadians with pension income that qualifies for the pension tax credit can allocate up to half of this income to their spouse or common law partner. Tax planning to determine the optimal allocation must consider the criteria to qualify for Old Age Security payments and certain other personal tax credits so should be undertaken with our expert Canadian income tax lawyers.
RRSPs are the most important tax planning strategy for individual taxpayers. An RRSP provides a tax deduction for the contribution, while also allowing the amount to grow tax free until retirement.
Although the 2016 contribution deadline is February 28, 2017, Canadians should contribute to their RRSPs as soon as possible because the sooner the contributions are made, the more they benefit from compounded tax free growth.
Registered Disability Savings Plan (RDSP)
If you have disabled or infirm Dependents the Registered Disability Savings Plan allows parents and others to save for the long-term financial security of a disabled person. Since contributions to an RDSP are not tax deductible contributions that are withdrawn are not included in the income of the beneficiary. However there are certain income inclusions, notably the Canada disability savings grant (a matching government grant of up to $3,500), Canada disability savings bond, and investment income earned in the plan that will be included in the beneficiary’s income when withdrawn.
Open Tax Free Savings Accounts (TFSA)
The tax free savings account can be used to generate tax free savings. Although contributions to a TFSA are not tax deductible like RRSPs, the earnings from any investment source in the account are not subject to taxation when earned or when withdrawn.
Use Family Members to Income Split with TFSA
Generally when a Canadian gifts shares or other investments to a spouse or child, the attribution rules in the Income Tax Act kick in so that any income earned on the gifted amounts accrues to the parents personally. However, because income earned inside a TFSA is free of tax, Canadians can gift investments or shares to a family member’s TFSA account without having the income taxed back to them under the attribution rules. This is a big tax planning advantage around the TFSA personal contribution limit. Remember that gifting shares may result in tax on any accrued gain at the time of the gift. Also with a gift to a spouse any loss will be denied.
Registered Education Savings Plans (RESP) Contributions
Registered Education Savings Plans (RESP) allow saving money for a child’s education with the benefit of a helpful tax break. While the amounts contributed to the RESP are not income tax deductible, the funds themselves accumulate tax-free. The government also provides a no strings grant equal to 20% of a contribution to an RESP up to a maximum of $500 per annum with an upper limit of $7,200 over the life of the RESP. The contributions can accumulate income tax free, and the rules allow for a maximum contribution of $50,000 over the life of the Registered Education Savings Plan.
Eliminate Offside Assets in RRSPs
Some Canadians manage their own RRSP through discount brokerage accounts or other financial institutions. The risk in doing so is that not all Canadians are aware that only certain types of investments are eligible for RRSP accounts. Non-qualifying RRSP investments are taxed at 50% of the amount of the investment when placed into an RRSP.
Taxpayers can claim a credit on this punitive tax by disposing of the ineligible investments within the taxation year that they are purchased. Proper tax planning advice should be sought from a Canadian tax consultant to ensure that all non-qualifying investments are disposed of before they trigger adverse income tax penalties.
Home Buyers Plan Repayments
If you have withdrawn funds from your RRSP for an eligible first time home purchase you have to make annual repayments by December 31 of every year. If you fail to do so you will have an income inclusion.
Plan for Retirement
Taxpayers who are getting on in years and have an RRSP account will need to be aware of the RRSP rules. If a taxpayer is turning 71 in the current taxation year, they must convert their RRSP to a Registered Retirement Income Fund (“RRIF”) no later than December 31. Failure to do so means the full market value of the RRSP will be added back into income for the current year of the 71st birthday.
Be aware that there are options in addition to a RRIF; you can choose to receive an annuity, a lump sum payment or a combination. If the taxpayer has a spouse, they may also consider creating a spousal RRSP so that they can contribute to the plan until the spouse reaches 71. In order to do so, the taxpayer must have unused contribution room left on their personal RRSP account.
Read about Charitable tax planning in Part 2 of this Canadian tax lawyer year end tax planning article.
Read more by clicking on Charitable Tax Planning.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."