Although tax-filing season may be far off in your clients’ minds, the end of the calendar year is a good opportunity to review some key tax-saving tips with them.
Here’s a checklist that you should discuss with your clients to help them stay on top of their taxes:
– tax-free savings accounts (tfsas)
TFSAs are still not as popular as they ought be, says Jason Safar, partner in the tax services practice with PricewaterhouseCoopers LLP in Mississauga, Ont. Now that the annual contribution limit has been bumped up to $5,500 from $5,000, this could be a good time to review the TFSA rules with your clients.
“There’s still a lot of confusion over TFSAs,” Safar says. “And, as a result, I think there is still little use of them by clients.”
Much of the confusion for those who hold TFSAs concerns how they regain contribution room after making a withdrawal. In particular, your clients should be reminded that withdrawals from a TFSA can be replaced only at the beginning of the next calendar year. Therefore, clients who are considering making a withdrawal should do so before Dec. 31 in order to be able to replenish the amount in 2014.
– miscellaneous tax credits
Credits such as the children’s arts tax credit, children’s fitness tax credit and public transit tax credits are assessed per calendar year, so your clients should take advantage of these tax credits by the end of the year, says Peter Megoudis, partner, tax, global employer services, with Deloitte & Touche LLP in Toronto. Megoudis also recommends reviewing all credits and deductions, such as political contributions, charitable donations, and child-care and medical expenses.
– discounts for seniors
Clients in Ontario aged 65 and older – or family members who live with them – now can claim the healthy homes renovation tax credit. This credit allows individuals to claim up to $10,000 worth of eligible home improvements on their tax returns.
“As clients get older, they may have to modify their houses,” Safar says, “which can be costly, especially if it involves a new bathtub, outdoor ramp or stair climber.”
The amount of money clients can get back for these expenses is calculated as 15% of the eligible expenses claimed. For example, if your client claims $10,000 worth of eligible expenses, he or she could get $1,500 back.
Other provinces are implementing property-tax deferral programs for seniors or eliminating property taxes for seniors altogether. (For more on provincial tax changes, see story on B9.)
– charitable donations
It’s important for your clients to remember that charitable donations must be made by the calendar yearend. As well, clients can make in-kind donations of qualifying securities that have unrealized capital gains.
This strategy can be very tax-efficient, says Todd Sigurdson, a tax and estate specialist with Winnipeg-based Investors Group Inc., because the inclusion rate is 0% on the capital gains on in-kind donations. As a result, your clients would not pay any taxes on the capital gains and would receive a charitable donation tax credit.
In addition, a “first-time donor’s supercredit” was introduced in this year’s federal budget. For the next five taxation years, first-time donors can receive a 25% credit on up to their first $1,000 of donations made from March 2013 through to 2017. (For more on this tax credit, see story below.)
– offsetting capital gains
Clients who have incurred any capital losses before yearend should sell those investments to offset any capital gains that will be realized in 2013 or in the previous three taxation years, says Sigurdson: “If they want to offset any capital gains that they had on their 2010 tax return, then this would be the last year that they can do that.”
As well, clients who are considering selling investments that will result in capital gains might be advised to defer the sales until January of next year in order to defer payment of taxes on the capital gains for another year.
– final rrsp contributions
Clients who have turned 71 years of age in 2013 will have until this yearend to make a final RRSP contribution before they have to convert their RRSP into a registered retirement income fund. For individuals who are 71 years old and still working, Sigurdson suggests making an overcontribution in December.
“The clients will get new room for contributions on Jan. 1, 2014, so they wouldn’t be overcontributed anymore,” says Sigurdson. “While they will receive a 1% penalty for overcontributing in December, it is far less than what they will receive in a [tax] refund.”
– defer interest
Recommend that your clients hold off on purchasing any guaranteed investment certificates or bonds until 2014. Interest is reported every year on the anniversary date of the investment’s purchase, so waiting until January will mean that your clients will not have to declare interest on the new investment until January 2015.
– review u.s. compensation rules
Canadian clients working in the U.S. or American clients working in Canada should consider the deferral of remuneration rule on either side of the border.
Both Canadian and U.S. tax laws allow for a taxpayer to defer remuneration (in either salary or bonuses) to a future year; however, in the U.S., the election to defer must be made before Dec. 31.
According to U.S. law, there is no limit to the number of years a person can defer. However, Megoudis says, Canadian law states that it cannot be more than three years: “If you are [an American] living in Canada, then you will want to comply with both [countries’] rules.”
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