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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Wise investors care about risk. Others shop for returns. Portfolio battles are won or lost at this basic level." |
Vancouver, BC (March 22, 2007): My earlier commentary focused on tax smart saving and investing. Today's focus is on timely tax tips to consider.
An advertisement from Morgan Stanley pointed out: "You must pay taxes. But there's no law that says you gotta leave a tip."
Adrian Mastracci, fee-only portfolio manager at Vancouver based KCM Wealth Management says, “Tax planning is about getting your ducks in order so that the least amount of tax comes out of your pocket. There is much to digest this year. Especially for couples.”
Note: Some tips include references to the March 19, 2007 Federal Budget proposals. The affected tips are noted with an asterisk (*) in their titles.
One important element is that dividend taxation has reduced noticeably since 2006. In BC, the highest tax rate on eligible dividends drops to 18.5% from 31.6%. Some Provinces are phasing this in.
Consider the big picture. Make it a family affair by including all members. Pursuing one election often affects other tax areas. A taxable income projection with one or two “what ifs” shows the way.
A dose of common sense is a must in tax planning. Take a look two or three times a year. A joint meeting with the investment, legal and tax professionals gets everyone on the same page.
Here are my tax tips to trim taxes in 2007:
1. Pension income credit
The first $2,000 of qualifying pension income gives rise to a tax credit. The type of income eligible for the pension income credit differs depending on age:
- For those 65 years of age and over, eligible pension income includes annuity payments from the employer pension plan, RRSP’s or deferred profit sharing plans, and payments from a RRIF.
- For those under 65 years of age, eligible pension income includes annuity payments from the employer pension and some receipts resulting from the death of a spouse.
Other income like CPP, OAS and lump sum RRSP withdrawals do not qualify. Arranging the finances may benefit from converting a portion of the RRSP to a RRIF.
2. Pension income splitting
In 2007, spouses and common-law partners can elect to split up to 50% of the pension income that qualifies for the $2,000 pension credit summarized above. Say the difference in tax rates between spouses is 10%. That will save $1,000 for every $10,000 of pension income that is split. This is an election to be made in the 2007 tax returns. Unlike splitting CPP, it’s not an actual split of income. Both spouses must agree to the allocation. The decision is revisited annually.
The election should minimize a family’s overall tax load. It’s possible to split the pension income but lose ground in other areas. Care should be exercised when OAS clawback applies or qualifying for other credits. Such as age credits and medical expenses credits. In addition, US citizens resident in Canada should consider the US tax implications of splitting Canadian pension income.
3. Phased retirement*
This new provision, starting in 2008, allows employers to offer phased retirement programs. This encourages staying in the work force. Employees can receive pension benefits from a defined benefit pension and simultaneously accrue further benefits. Planning can begin for those who may qualify.
Employers will offer qualifying employees up to 60% of their accrued defined benefit pension, while accruing additional pension benefits on a current service basis. Qualifying employees are at least 55 years of age. They must also be eligible to receive a pension without an early retirement reduction.
4. Donate securities*
Donate securities that have gained in value directly to your favourite charities. The budget now includes private foundations. You won’t pay tax on the capital gains. Your donation receipt is based on the market values of the donated securities.
For some, it makes sense to review and design a long-term charitable donation schedule while living. Together with the charitable wishes to be included in the will.
5. Gains and losses
Review your capital gain and loss strategies. Consider the losses you may be carrying forward from 2006. Revisit your tax cost entries from the $100,000 capital gain exemption claimed in 1994.
Don't be afraid to lock in a gain. Especially if you have a loss position that has faint hopes of turning into a profit. A little portfolio rebalancing helps.
6. Payers and savers
Many spouses or common-law partners have one person who earns the higher income. Often that same person owns more financial assets and may also have the employer pension.
One goal should be to equalize retirement incomes. Hence, the higher-income person can pay the family expenditures. The lower-income person can do the saving and accumulate more financial assets. The higher-income person can also pay the income taxes for the lower-income one.
7. RRIF conversions*
Converting the RRSP (likely to a RRIF) used to start for those who turned 69 in 2007. The budget proposes to change it to age 71. The conversion must be finalized by December 31. Additional RRSP contributions (personal & spousal) can be made by some, subject to available room, for 2 more years.
Minimum RRIF withdrawal rules are waived in 2007 and 2008 for RRIF owners turning 70 or 71 in 2007, or 71 in 2008. Anyone in the new age limits, and receiving periodic RRIF payments, may wish to review the wisdom of suspending the payments. Conversion also applies to DPSPs and RPPs.
RRSP deposits must still be made before converting, unless there is a younger spouse. Qualifying investments are the same for both plans. However, a RRIF has to make the required payments.
8. RRSP*
Start 2007 RRSP contributions to your account or spousal plan. There is no reason to wait until early 2008. The maximum 2007 RRSP is $19,000 less the pension adjustment, plus the unused room.
A request can be sent to Canada Revenue Agency to reduce tax deducted by your employer. It's like receiving the tax rebate in advance.
Spousal RRSPs are still one major way of building nest eggs. Make spousal deposits to the lower-income spouse. You still get the tax deduction at the higher rate.
Investors who don't need RRIF income during age 69 or 70 can review making additional RRSP deposits and allowing their plans to grow larger during the 2 years in question. It can make a substantial difference, particularly to larger accounts. These investors should contact their plan trustees to ensure that their wishes are followed during the proposed 2-year transition.
9. RESP*
If you have children, grandchildren, nieces, nephews, consider making RESP deposits by December 31, 2007. The total lifetime maximum is proposed to increase to $50,000 from $42,000. RESP funds can now be used for some part-time studies.
The maximum $4,000/year, per child, is proposed to be removed. The annual grant amount is proposed to increase from $400 to $500. A family RESP is preferred for two or more related beneficiaries. It’s an easy way to help with the cost of education.
10. Registered Disability Saving Plan*
This is a new proposal and comes into effect in 2008. It helps save for the long-term financial security of a child with a severe disability. The RDSP will be based generally on the existing RESP design.
Contributions will be limited to a lifetime maximum of $200,000, with no annual limit, until the end of the year in which the beneficiary attains 59 years of age. The government will also contribute depending on family income and your amount contributed. Payments from an RDSP commence by the end of the year in which the beneficiary attains 60 years of age. More details are still to come.
11. Splitting CPP
CPP can be split with a spouse or common-law partner when the younger one attains age 60. An application must be made to split it.
Say the monthly entitlements are $200 and $800 respectively. The result is $500 received by each. This can be reversed at any time.
12. OAS clawback
The OAS clawback starts near $63,500 of net income and is all paid back at about $102,200. It is also affected by the higher dividend grossup amounts.
Hence, it may be beneficial to have dividend income received only by one spouse. Alternatively, in some disproportionate amount. Planning benefits from the “what if” scenarios.
13. Business structure
The business structure might use some polish. Perhaps you have a proprietorship, a partnership, an incorporated company, or a complex set of holding companies.
Evaluate the business reasons for having what you have now. Then examine if you can benefit by modifying the structure.
14. Crystallize the business*
Analyze if crystallization of your business, fishing property, or operating farm qualifies for the lifetime capital gain exemption. The budget proposes to increase it to $750,000 in 2008 from $500,000. The exemption will be limited to $625,000 for dispositions after budget day to the end of 2007.
Here are sample tax savings assuming full use of the exemption at today’s highest rates:
| Province |
Before Budget |
Balance of 2007 |
After 2007 |
| Alberta |
$97,500 |
$121,875 |
$146,250 |
| British Columbia |
$109,250 |
$136,563 |
$163,875 |
| Ontario |
$116,000 |
$145,000 |
$174,000 |
| Newfoundland |
$121,500 |
$151,875 |
$182,250 |
Please note that this exemption may give rise to paying Alternative Minimum Tax (AMT).
15. Cross border issues
Canadians who spend time living in the USA may be required to file a US tax return. It is important to determine whether you meet the “substantial presence” test. If you carry on business in the USA, you may also be required to file a US tax return.
Canadians who own property in the USA should review the estate tax rules that apply. Renting your property may subject you to withholding taxes.
US citizens living in Canada should seek advice on the tax filings that the IRS requires. Non-filers run the risk of losing exemptions to which they are entitled.
US citizens who own Canadian private companies are wise to check the US tax treatment of receiving investment income. Such as capital dividends.
16. New child tax credit*
Budget 2007 proposes a new $2,000 child tax credit, indexed for each child under age 18. It will provide personal income tax relief of up to $310 per child. Either parent may claim the credit. Any unused portion of the credit is transferable to the parent’s spouse or common-law partner.
17. Trusts and minors
There are variety of spousal trusts, alter ego trusts and other approaches for consideration. The rules are more complex and specific for each case. For example, attribution does not apply to capital gains realized by minor children. These provisions require an in-depth look at the specifics to determine the benefits.
There is something for everyone in these timely tax tips. Remember the dose of common sense.
Happy planning. I welcome your questions, comments and opinions.
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