Financial advisors would be wise to remind their small and medium-sized private business-owner clients that they need to take advantage of income sprinkling while they still can. The 2017 taxation year is drawing to a close, and this strategy may be disallowed next year.
That’s because the federal Liberal government plans to introduce several significant changes to the way that private Canadian corporations are taxed. Some of those changes are scheduled to take effect in January.
These measures include possible changes to how dividends are paid out to family members from a corporation. In addition, a new “reasonableness test” will examine how much family members are involved in a business, which will affect the extent to which those dividends are taxed.
This means that 2017 could be the “last kick at the can” for making it worthwhile to pay out dividends to family members who are not involved in the business, says Peter Bangs, a partner in tax services with accounting firm MNP LLP in Ottawa.
“If the proposals are going to go through, you still have 2017 to pay out dividends to family members,” he says. As such, he adds, business owners need to “look where they are in the business cycle and decide how they’re going to distribute income.”
Bangs also suggests that clients who are in the process of, or considering, selling their businesses do so before the end of December to take advantage of the small-business capital gains exemption that applies to extended family members, a strategy that also is being targeted by the Liberals.
Although Ottawa insists the changes are aimed at the top 1% of income earners, Bangs says, the proposed changes will “affect small business right across the country.”
The biggest challenge, though, is that what the final rules will look like isn’t clear yet. As well, the feds may back off on the proposals or modify them. This makes rendering tax advice to private-business owners before yearend difficult.
“There’s a lot of uncertainty, and it’s causing a lot of confusion,” warns Dave Walsh, partner and tax service line leader with accounting firm BDO Canada LLP in Toronto. “It’s difficult to advise clients on how to conduct a transaction.”
As a result, clients are putting practices such as estate freezes on hold until they get a clearer picture of where the government is going with its tax reforms, says Curtis Davis, consultant, tax, retirement and estate planning services with Toronto-based Manulife Financial Corp.: “You don’t want to go through the process and expense if that doesn’t achieve what you’re looking for.”
One thing is certain, though, for this taxation year: filling out tax forms and claiming deductions will be a simpler process because the Liberals have scaled back various tax credits that were available under the previous Conservative government. Gone are the children’s fitness and arts tax credits, as well as the public transit tax credit.
Nevertheless, there are some tried-and-true measures worth discussing with your clients as the 2017 taxation year comes to a close, including:
– Capital gains and losses
You and your clients should start pruning their investment accounts to maximize capital gains and losses, says Davis. This means reviewing trades conducted throughout the year and seeing if there are any net losses or gains in non-registered accounts. If there are gains, then that potentially triggers a tax bill, he says, which can be offset by selling losing positions.
The Christmas holidays fall on business days this year, so the tax-loss selling date may get lost in the holiday hoopla. Thus, it’s important to act early.
The maximum contribution for TFSAs remains at $5,500 and the total cumulative contribution room, available since the TFSA was introduced in 2009, now is $52,000.
If your clients need to withdraw money from a TFSA, remind them that they’re better off doing so before yearend; sticking to this timing then allows the contribution of an amount equal to the withdrawal in the following taxation year, which begins in January. Any withdrawal next year can’t be replaced until January 2019 at the earliest (assuming the TFSA’s contribution room is maxed out).
– Charitable donations
This year is the last chance for Canadians to take advantage of the first-time donor supercredit for charitable contributions, Davis notes. This credit was introduced in 2013 and is set to expire on Dec. 31. First-time donors get a $250 credit on a maximum $1,000 donation.
Otherwise, Canadians can receive tax credits for contributions to registered charities. Donors can contribute a maximum of 75% of their net income and, in most cases, get a 15% credit on the first $200 in donations and 29% on amounts above $200. When claiming donation tax credits, Walsh says, “making them before the end of the year” is important.
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