As the 2016 tax year winds down, financial advisors don't have many new tax tools to help clients reduce their tax bills.
"There are not a lot of changes," notes Jamie Golombek, managing director, tax and estate planning, in Canadian Imperial Bank of Commerce's wealth strategies division in Toronto. Indeed, most changes relate to the elimination of tax credits created by the former Conservative federal government.
Here is a selection of the changes:
- TESTAMENTARY TRUST TAXATION
Frank DiPietro, assistant vice president, tax and estate planning, at Mackenzie Financial Corp. in Toronto, notes that this change could have an impact on clients who receive money from trusts under a will, which are known as testamentary trusts. New tax rules for these trusts, which begin in 2016, mean that money paid out of them (after a 36-month grace period) now will be subject to taxation at the top marginal tax rate. Gone are the graduated rates that used to apply indefinitely.
"Advisors and investors need to review income earned in their trusts for 2016," DiPietro says. "Paying out that income to beneficiaries [may make sense]" - provided the beneficiary's tax rate is lower than the top marginal rate.
- ARTS AND FITNESS CREDITS
Tax credits for kids' fitness and art classes are being phased out, says John Natale, assistant vice president, tax, retirement and estate planning services and advanced sales concepts at Manulife Financial Corp. This year, he says, they are being "reduced by half and will be eliminated in 2017."
For 2016, taxpayers can claim $500 for the children's fitness tax credit and $250 for the children's art class credit. Natale says this is the last year for these credits, so "it is important to make the payment for the classes before yearend." That means if your clients' kids have classes starting up in the new year, tell your clients to pay the fees now and claim them for this year because those fees can't be claimed for the 2017 tax year.
- EDUCATOR CREDITS
The new teacher and early childhood educators school supply tax credit applies to "accredited teachers or educators who claim $1,000 in expenses that are used to help kids in a learning environment." The receipts must "be vetted or approved by employers," Natale says. The credit is expected to cost the government $55 million, according to the Department of Finance Canada.
- TEXTBOOK & EDUCATION CREDITS
This is also the last year that students will be able to claim the education and textbook tax credits. The government is phasing out those credits in 2017.
DiPietro points out that, fortunately, the "tuition tax credit remains unaffected." It provides a 15% non-refundable tax credit on eligible fees for tuition and examination fees paid to a qualifying educational institution. DiPietro adds that the tuition credit is the "really big one. Tuition is the major cost for students and the [tax credit] that really gets the biggest bang for your bucks from a personal tax savings standpoint."
The textbook and education credit will not be extinguished entirely. Beginning in 2017, unused education and tax credits from prior years can be carried forward.
- FIRST-TIME DONOR SUPERCREDIT
The clock is also ticking on the first-time donor supercredit introduced in 2013. The supercredit bumped up the benefit a first-time donor to charity receives for amounts over $1,000. The extra 25% tax credit was one that Canadians didn't use as expected when the initiative was announced. The program was designed to run from 2013 to 2017.
- HOME ACCESSIBILITY TAX CREDIT
Golombek says another new measure for 2016 is the accessibility tax credit. Taxpayers who install fixtures such as grab bars or wheelchair ramps could be eligible for a 15% non-refundable tax credit for up to $10,000 on renovation expenditures.
And be aware of the longtime tax-planning strategies that play out each year and the deadlines associated with them:
- TAX-LOSS SELLING
DiPietro warns that the dates on which Christmas holidays fall this year means that the final date for selling stocks to lock in capital gains or losses is earlier this year: "Remember that these trades need to settle in 2016" and require three business days.
As well, he warns, be cognizant of the "superficial loss" rules, which prevents stocks that are sold from being bought back right away.
- RRIF AND RRSP CONTRIBUTIONS
You need to consider the timing of RRSP contributions if a client must convert his RRSP to a RRIF at the end of this year. A client can contribute to an RRSP only until Dec. 31 in the year that he or she turns 71.
- TFSA WITHDRAWALS
If a client is making a withdrawal from a tax-free savings account (TFSA), that should be done before yearend. That way, your client will earn back the TFSA room a year earlier than if he or she waits until the new year to make the withdrawal.
See also: Year-End Tax Planning 2016, free webinar
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