As 2018 comes to an end, tax advisors across Canada are busy restructuring and planning many corporations to respond to the new tax rules that came into existence this year.
BC’s New Tax Law Called Tax on Split Income (TOSI)
The biggest new tax law introduced this year is Tax on Split Income or TOSI for short. TOSI is so complicated that many tax advisors use a flowchart to visually follow the rules to assist in determining where the taxpayer stands with this rule this year. As the whole of TOSI law stands now, as the taxpayer reaches the age of 18, or 25 or 65, a different part of the TOSI rule applies. Similarly, as the taxpayer works more or less for the family business each year, a different part of the TOSI rule applies. Consequently, due to the introduction of TOSI, dividend sprinkling as done in prior years may no longer be tax compliant. Failure to comply with the rules is punitive – the “offside” dividend will be taxed to the source person at the highest tax rate which is 43.73 for 2018.
Tax Loss Selling
Another year end tax planning consideration is tax loss selling. The last three years have been a period of huge capital gains in the stock or the real estate market. Capital losses have special tax rules applied to them – a taxpayer cannot use their capital losses to reduce taxes due from employment income or business income. A capital loss can only reduce taxes owing from a capital gain that were earned during the past three years or in the future years. If a taxpayer has capital gains in any of the last three years, triggering capital losses to carryback is worthy tax planning at this point. However, note that buying back the same losing stock within 30 days will disallow the loss from being carryback or forward and will only result in the loss being added back to the cost of the stock.
Donation of Publicly Traded Stocks
On a different note, donating publicly traded securities with huge gains is great year end tax planning. The donation of publicly traded stocks will allow the donor to claim a credit for the full fair market value of the stocks on the date on donation. The first $ 200 of donation will receive 20% tax refund or $ 40. Any donation above the $ 200 will result in a whopping 47.7 percent tax refund. But the best part is capital gains accrued on the securities will not be taxed. The gains are tax free while the donation credit will be allowed at full market value. This is a double win.
Contibuting to RRSP
Last but not least, contributing to the RRSP. Despite having until March 1, 2019 to contribute to your RRSP that will be eligible for deduction for the 2018 year, planning for the amount to contribute is done at year end. Many taxpayers are not aware that an RRSP contribution does not mean the amount has to be deducted. The taxpayer has the option to carry a contribution forward to a higher income year where the resulting refund is much more favorable. Once the fund is in an RRSP account, gains and income will be tax sheltered. Transferring a stock you already own into an RRSP account is allowed but there are negative tax consequences. If the stock has a capital gain already accrued to it on transfer date, income taxes will apply on the capital gain. Unfortunately, capital losses incurred on stocks transferred into an RRSP account will be denied for tax purpose and hence lost. Think twice and take care.
A Happy and Prosperous 2019 to all.