Welcome to tax season.
I know what you’re thinking: it’s only January, my clients’ returns aren’t due until April 30 (or June 16 for self-employed taxpayers and their spouses) and tax slip issuers don’t even have to issue their T-Slips until the end of February or March. So, why is January the start of tax season?
If you’re confused, it’s likely because you’re probably thinking about tax preparation season, in which clients prepare their 2013 tax returns to report all income, expenses and deductions for the past year.
What I’m referring to, however, is 2014 tax season. That’s right: now is the time to actually begin helping clients save taxes for the current — and future — years. Thus, here are three ideas you can discuss right away with your clients to begin saving taxes in 2014:
1. Reduce tax deductions at source.
Although your clients may be looking forward to receiving their 2013 tax refund this spring, you know that a tax refund is simply a sign of poor tax planning in that the client has loaned his or her hard-earned money to the Canada Revenue Agency for a year — or longer — and they’re just getting their own money back, interest-free.
An easy way for clients to avoid or at least try to minimize their tax refund for 2014 is to complete CRA Form T1213, “Request to Reduce Tax Deductions at Source” in which clients list various deductions and credits that they plan to take when they file their 2014 tax return, such as RRSP contributions (other than those made through payroll deduction), support payments or child-care expenses. This form is then sent to the CRA and, if approved, clients will receive an authorization letter that they then can hand over to their employer’s payroll department, authorizing it to reduce the amount of taxes withheld at source from the clients’ paycheques.
This way, your clients can get their refund throughout 2014 and you can encourage them to set up regular, monthly contributions to save for their children’s post-secondary education through a registered education savings plan; save for retirement in an RRSP; or just sock the money away in a tax-free savings account.
2. Donate funds “in-kind”
Most clients only think about charitable giving in December, just before year end, to ensure they get their donation receipt in time to claim it for the current taxation year. But if your clients regularly donate to charity annually, why not encourage them to donate appreciated publicly-traded shares, mutual funds or segregated funds “in-kind” to a registered charity or foundation throughout the year? Not only will they get a tax receipt equal to the fair market value of the shares or funds donated, but they will also avoid paying taxes on any of the accrued capital gains.
This is a great discussion to have with clients when they come in for an asset allocation/rebalancing meeting. Given the substantial gains in the U.S. and global equities markets in 2013, why not suggest to your client that when rebalancing their portfolios for 2014 and crystallizing some winners, they do so in a tax-effective manner by donating some of the winners “in-kind” to charity?
3. Prescribed Rate Loans at 1%
There’s good news for couples or families who want to do some income-splitting in 2014 as the prescribed rate has dropped back down to 1% as of Jan. 1. In a typical income-splitting loan strategy, a high-income spouse (or partner) loans funds at the prescribed rate to his or her lower-income spouse. The investment returns minus the tax-deductible interest on the spousal loan can then be taxed in the lower spouse’s hands.
The advantage of advancing a loan when the prescribed rate is low is that under the tax rules, clients need only use the prescribed rate in effect at the time the loan was originally extended to avoid the income being attributed back to the higher income spouse. In other words, if your clients establish the loan during the first quarter of 2014, when the prescribed rate is 1%, they can use that rate for the duration of the loan, which could be unlimited if there is no fixed term and it’s simply a demand loan.
Prescribed rate loans can also be used to help your clients fund their minor children’s expenses, such as paying for private school and extracurricular activities, by making a prescribed rate loan to a family trust.