Published: March 9, 2020
Last Updated: October 25, 2021
Top 2016 Year End Income Tax Planning Tips by Canadian Tax Lawyer Part 4
This Part 4 of our Canadian tax lawyer year end tax planning article focuses on investing.
Top Income Tax Investing Tips
While RRSPs and TFSAs are important vehicles for investments and tax planning, they do have contribution limits which generally results in money held outside of these accounts as well. So opportunities for tax planning around a taxpayer’s investments outside of the RRSP and TFSA are crucial.
Capital Gains & Losses
Investors with capital losses in the year can benefit from them to reduce capital gains for the current year and they may also be carried back to reduce capital gains from the 3 previous years and thereby allow the investor to receive a refund of previously paid income taxes. If you own capital property that has gone down in value, consider disposing of it in order to shelter any possible gains that you’ve made in the current year. If you have shares with accrued gains consider deferring the sale until the new year to defer the taxation by one year. This type of tax planning can be complex so suitable tax help from one of our top Canadian income tax lawyers is essential.
Delay Purchases of Mutual and Equity Funds
Canadians contemplating the purchase of mutual funds should consider waiting until the beginning of the new year to do so. A common accounting policy of both mutual and equity funds is to make distributions once per calendar year. Taxpayers who purchase these types of funds will be allocated a full share of the fund’s gains and income – meaning they will be allocated a full year’s worth for taxation purposes even though they have not held the funds for the entire year.
By waiting until the new-year before purchasing investors will not have to recognize the income, which was not even received, in their income until the next taxation year.
Review Interest Expenses
Investors should take some time before the year-end to review their debts and determine which interest expense amounts are tax deductible. Depending on the use of borrowed money there may be tax savings available. Generally speaking, if borrowed money is invested to earn business or investment income, it will be deductible for income tax.
Good tax-planning involves the careful structuring of borrowing practices. Investors should always ensure that they borrow for business or investment purposes wherever possible while utilizing non-borrowed money for personal expenses. By doing so, investors will be able to maximize their tax savings. This type of planning should be carefully implemented by an experienced Canadian tax lawyer to ensure income tax deductibility.
Use your Lifetime Capital Gains Exemption
Entrepreneurs who own SME shares of a qualified small business can make use of a lifetime capital gains exemption (LCGE) which is in excess of $800,000. Owner-managers who have shares in a small business should consider disposing of them to a spouse or corporation they control (called a crystallization) in order to enjoy the income tax benefits of the capital gains exemption.
SME owners who cannot claim the lifetime capital gains exemption may consider using the proceeds from the sale of small business shares to purchase shares in another qualified small business. The benefit of this tax plan is that the Income Tax Act allows the capital gain to be deferred until disposal of the new business if the new shares qualify.
Part 5 of our Canadian tax lawyer year end tax planning tips discusses small business owners.
"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."