Another tax year has flown by, and it is time to consider some year-end tax planning.
The good news is that the Government has not raised the inclusion rate in respect of capital gains. Currently, only 50% of a capital gain is taxable. There has been much speculation that this would increase to 75%, a rate that we have not seen since February 2000. But it is a possibility in the new year and may affect some of your year-end planning. My humble opinion is that we won’t see an increase.
The usual planning steps need to be considered:
Selling assets with accrued losses to trigger a deduction in the current year. Note that for 2022, publicly traded securities must be sold before December 28th to be effective this year. The Settlement Date is supposed to be 2 days after the trade. Those who are more cautious might consider completing any necessary trades on or before December 28th.
Accelerate the recognition of deductible expenses
Postpone the receipt of taxable income. The tax brackets are increasing next year due to inflation so there will be a reduction in some tax rates
If your tax rate will be higher next year, the usual acceleration of expenses and postponement of income might not be efficient – get professional advice.
Make charitable donations before the end of the year to get the charitable tax credit in 2022
Given the uncertainty of businesses in this post-Pandemic world, perhaps thought should be given to an estate freeze. Many businesses are now worth less than before Covid. Although this is beyond the scope of this Newsletter, I would suggest that you look at my Newsletter Estate Freezing in Trying Times
Gifts to Employees
As we approach Christmas, it is important to note the Canada Revenue Agency (CRA) administrative policy regarding non-cash gifts to employees.
Employers can give their employees up to two non-cash gifts per year, on a tax-free basis, for special occasions such as Christmas, Hanukkah, birthdays, and marriages. As long as the total cost of the gifts to the employer, including taxes, is not more than $500 per year, the employer can deduct the cost of the gifts, even though the employee is not taxable on the value of the gift.
This does not apply to cash or near-cash gifts and awards. The value of such gifts and awards will be considered a taxable employment benefit.
The CRA has recently updated its administrative policy (effective for 2022 and subsequent years)
Cash or “Near-cash” Gifts and Awards
Cash or near-cash gifts or awards are taxable. This includes employer-reimbursed items as well as items that can easily be converted to cash, most gift cards (see below), prepaid credit cards issued by financial institutions, and digital currencies e.g. Bitcoin.
Gift cards (including gift certificates, chip cards, and electronic gift cards) will be considered “near-cash” gifts (and, therefore, taxable) unless the following apply (in which case the gift card will be considered non-cash):
the card comes with money already on it and it can only be used to purchase goods or services from a single retailer or group of retailers identified on the card; and
a record is kept containing the following information:
name of the employee,
date the gift card was provided to the employee,
the reason the gift card was provided to the employee,
type of gift card,
amount of the gift card and
name of retailer(s).
The gift could, however, be in the form of additional technology or office equipment. BUT it is important, for this purpose, that the employer purchase the item and then make a gift to the employee, and not give the employee cash or near cash amounts to pay for the expenditure.
Where the cost of the gift or gifts exceeds $500, the total fair market value of the gift(s) will be included in the employee's income. There is no exemption for the first $500 of a year-end gift. If the cost of the gift exceeds the $500 limit, the gifts are deemed to form part of the employee's remuneration package.
For employers who want to give employees gifts at this time of year, as opposed to cash bonuses, the benefit of being able to deduct the value of the gifts while allowing the employees to receive the gifts tax-free can be significant.
Income Splitting with Low Prescribed Rate Loans
This isn’t really a year-end issue but is an important consideration in one’s overall planning. I have written about this many times, most recently in January 2020.
At that time, the prescribed rate was 2% and then dropped to 1%, making it even more attractive. My Newsletter Low-Interest Loans to Family Members was written with a 1% prescribed rate in effect.
The prescribed rate is currently 3% and there is a reasonable chance that the rate will increase in 2023, so be prepared, and consider making loans now.
Aside from the need to have the proper paperwork to document the loan, in order to avoid the attribution of income on the loaned funds and any property purchased with the loaned funds, the interest has to be payable, and actually be paid, no later than 30 days after the end of the taxation year. No matter how insignificant, this interest must be paid by January 30th, not January 31st.
Not only should paperwork be kept to show the payment, but the lender should be including the interest received in his or her tax return for the year of receipt of the interest. A lot of good, and expensive, tax planning could go out the window because the interest was paid 1 day too late, or because the lender neglected to include the interest payment in his or her income.
Once the loan is in place, the prescribed rate at the time of the loan will continue to be applicable to the outstanding balance of the loan, even if the prescribed rate increases in the future.
Bill C-208; Inter-generational Transfers
A Private Members Bill, Bill C-208, is in effect which reduces the tax cost of transferring one’s business to one’s children. I have written about this in June 2021 and again in July.
For those who are contemplating a transfer of the business to the next generation, the time to do it is now. Although even Trudeau and Freeland wouldn’t have the fortitude to repeal these provisions, they will, no doubt, tighten them up. It is easier to do the transfer before the rules get tightened.
Retained Earnings Strip
Many taxpayers are engaging in a transaction to allow them to extract retained earnings from their corporations at capital gains rates. There are debates among professionals as to whether there is any risk that the CRA will seek to attack such transactions, even though they don’t break any of the rules, as opposed, perhaps, to the spirit, of the Income Tax Act.
Currently, in Ontario, the combined top tax rates are as follows:
This makes the extraction at capital gains rates particularly attractive, now that there has been no increase in the capital gains inclusion rate.
These transactions are particularly helpful for taxpayers who owe large amounts to their corporations and would otherwise have to write a cheque to repay the amount due to the corporation.
Although such transactions did not arise as a result of Bill C-208, we can anticipate new anti-avoidance rules to stop these transactions when the Government introduces new rules to “fix” Bill C-208.
If you are inclined to look at a strip of Retained Earnings, the time to do it is now.
As always, I would be pleased to work with your advisors on any of these issues.
I hope everyone has a safe holiday season.
- Chuck