As the end of the year quickly approaches, consider the following strategies to reduce taxes for 2007:

RETIREMENT PLANS

• Contribute to your RRSP. You have until Friday, February 29, 2008 to make a contribution to your RRSP that will entitle you to a deduction on your 2007 tax return. Make that contribution sooner rather than later, in order to get your money working for you inside the RRSP as soon as possible. Even if you’re not sure which investments to buy, contribute to your RRSP and “park” the cash until you’ve made a decision about what to invest in. You’re also permitted to make a non-deductible excess contribution to your RRSP.  This will get more money working for you in your tax sheltered RRSP.  Provided your over contributions do not exceed $2,000 at any time, you will not be subject to a 1% penalty tax on over contributions.  People running a monthly pre-authorized chequing plan (PAC) into their RRSP on the first of the month may be counting on using this contribution towards a reduction of income on their 2007 tax return.  For 2008 what you will find is that the March 1st contribution will not be included as a first 60 day contribution. Due to the leap year, the first 60 day period in 2008 ends on February 29th. If this is a concern, you may wish to advance that particular payment to sometime prior to the 29th.
  
  
• Contribute to a spousal RRSP. Contribute to a spousal RRSP before year-end to effectively reduce the length of time that must pass before your spouse can make withdrawals without part of the withdrawal being tax in your hands. Example: If you contribute by year-end, your spouse can make a withdrawal of those dollars on January 1, 2010 at the earliest without the withdrawal being attributed back to you and taxed in your hands. If you wait until January 1, 2008 to contribute, your spouse will have to wait until January 1, 2011 before making a withdrawal without attributing the withdrawal to you.
  
  
• Withdraw funds in a low-income year. Does it ever make sense to withdraw money from an RRSP or RRIF before you need the money? In some cases, yes it does. If you have little or no other income this year, you may be able to make a withdrawal from the plan before year-end and pay little or no tax on the withdrawal. It could make sense to do this where you are willing to invest that money outside the RRSP or RRIF once it’s withdrawn, or where you need the money to meet certain costs of living.
  
  
• Maximize your 2007 earned income. It’s not too late to increase your earned income for 2007, in order to provide greater RRSP contribution room for 2008. This is particularly easy where you own your business and can readily control your compensation. Once your earned income for 2007 reaches $111,111, you’ll reach the maximum RRSP contribution limit of $20,000 for 2008.
  
  
• Base withdrawals on age of younger spouse. If you reached age 71 in the year, chances are pretty good that you’ll be establishing a RRIF by year-end for at least some of the assets in your RRSP. Be sure to base the mandatory (i.e. minimum) RRIF withdrawals on the age of your spouse, if he or she is younger. This will reduce the required minimum annual withdrawal, and will allow you to defer tax longer.
  
  
• Make your required HBP repayment. If you participated in the HBP prior to 2006, you have a repayment due in the 2007 tax year. This repayment can be made as late as February 29, 2008.  Don’t forget to make this contribution to your RRSP or you’ll face tax on the deficient repayment. Use Schedule 7 on your 2007 personal income tax return to identify the repayment under the HBP.

INVESTORS

• Observe investment deadlines for 2007. If you hope to sell an investment at a loss this year to apply the loss against capital gains, the settlement date (not the trade date) on the sale will have to fall in 2007. To ensure this happens, you’ll have to initiate the sale on or before Monday, December 24, 2007 (for Canadian stock markets). If you wait until December 24, initiate the sale early that day since most stock markets may close early that day too.
  
  
• Time the purchase of certain investments. If you’re planning to invest in an interest-bearing security (like a guaranteed investment certificate (GIC)) that has a maturity of one year or longer, consider waiting until the new year before making the investment. By waiting, you won’t have to pay tax on any accrued interest until 2009 – the year of the first anniversary of the investment. Also, consider waiting until early in 2008 to purchase any mutual funds that are expected to make taxable distributions before the end of 2007. You’d hate to pay tax sooner than necessary.
  
  
• Defer capital gains where appropriate. If you’re thinking of selling an asset for a profit and the transaction is going to give rise to a tax liability, consider delaying that sale until after December 31, 2007 to defer the tax until 2008. In fact, the taxes owed would not be payable until April of 2009 when you file your tax return for 2008.
  
  
• Give investments to a child. Consider transferring investments to a child before year-end where that investment has dropped in value. This triggers a capital loss that you can use to offset capital gains, and passes the tax liability on any future growth in the investment to your child. Capital gains realized by minor children are not subject to attribution. By transferring these investments today you may also minimize probate fees at the time of your death. 
  
  
• Claim a capital gains reserve. If you’re thinking of selling an asset by year-end at a profit, consider structuring the sale so that you collect your sale proceeds over more than one year. You’re able to spread the capital gains tax liability over a period as long as five years (including the year of sale) if you take payment over five years. As a minimum, consider taking payment partly this year, and partly in January 2008 in order to spread the tax hit over two years.  Consult a tax professional to structure this properly.

FAMILIES

• Set up loans to your spouse. You can split income with a lower-income spouse by lending money to your spouse. A promissory note should be created and interest should be charged at the prescribed rate in effect at the time the loan was made. Your spouse must pay the interest by January 30 each year for the prior year’s interest charge and can deduct that interest cost where the borrowed money is used to earn income from an investment or business. You will have to report and pay tax on the interest income you receive. Now, your spouse will pay all the tax on any income or capital gains earned from the investment acquired with the money lent to him or her. Set up a loan by year-end to take advantage of this income-splitting strategy for 2007 and later years. The prescribed rate is just 5% for the last quarter of 2007.
  
  
• Split income in other ways. There are many other ways to split income with family members, including transferring investments to adults or minor children. There will generally be no attribution of income back to you when transferring investments to an adult child, and there will be no attribution of capital gains (although other income will be attributed back to you) for transfers to a child 17 or under in the year. Setting up an income-splitting strategy before year-end ensures you receive the most in tax benefits for 2007 and later years from this strategy. Since a transfer is a disposition of the investment for tax purposes, you should first determine the tax cost associated with this strategy.
  
  
• Registered Education Savings Plans (RESPs).  Specifically, the annual $4,000 contribution limit was removed, the lifetime contribution limit was increased to $50,000 and the Canada Education Savings Grant (CESG) was increased to $500 per year, or $1,000 if there is unused grant room because of contributions of less than the maximum CESG-eligible contributions from previous years. Consider contributing at least $2,500 to an RESP by year-end to obtain the maximum CESG for 2007 or more if you have unused grant room from previous years. Speak to your financial advisor about obtaining the maximum CESG in 2007 for your education savings plan.
  
  
• Collect your receipts for the new Child Fitness Tax Credit. Beginning in 2007, parents of children under the age of 16 are entitled to a new, non-refundable tax credit of up to $500 for each child registered in an eligible program of physical activity. Unlike other non-refundable tax credits, it will be important for all parents who are eligible for this tax credit to keep original copies of receipts from organizations providing eligible programs of physical activity.
  
  
• Pay child care expenses. Qualifying child care expenses can be claimed on your tax return for 2007 if those costs are paid in 2007.  Consider paying adult children (18 or older in the year) for any time during 2007 in which they looked after the younger children (16 or younger throughout the year) to allow you to be at work earning an income. A deduction will be available to you, and your adult child will face the tax on the payments (although he or she may pay little or no tax depending on his or her other income).

SELF-EMPLOYED

• Pay salaries to family. You can split income with family members by paying them salary or wages in 2007 for services they’ve provided to your business. Review what services family members provided in 2007 and determine whether you might be able to justify paying deductible (to your business) compensation to family members before year-end.
  
  
• Accelerate expenditures. Consider making certain business expenditures before year-end to be entitled to claim a deduction for these costs in 2007. 
  
  
• Defer income. To the extent you can defer certain income until 2008, you’ll defer the tax on that income for a full year. You may be able to defer the completion of certain work or the issuance of invoices in order to accomplish this. Speak to a tax professional concerning this strategy.

SENIORS

• Allocate pension income to your spouse. Starting in 2007, spouses and common-law partners will be permitted a new income splitting opportunity that will allow spouses/common-law partners to allocate up to one-half of their income that qualifies for the existing pension income tax credit to their resident spouse/common-law partner for income tax purposes. Be sure to plan your 2007 pension income (including RRIF income if you are over the age of 65) based on the opportunity to allocate up to 50% of your pension income to your spouse/CLP. This may result in greater after-tax income from your retirement plans. Speak to your financial advisor about the optimal allocation in your situation.
  
  
• Convert your RRIF back to an RRSP.  The 2007 federal budget increased the maturity age, the end of the year in which an RRSP annuitant must convert their RRSP to a RRIF, from the age of 69 to 71. If you are between the ages of 69 and 71 and have unused RRSP contribution room from previous years, consider converting your RRIF back to an RRSP (or open a new RRSP) and make a contribution to your plan to create tax savings. Conversely, if you choose to keep your RRIF intact, consider reducing your RRIF withdrawals if you don’t need them, as there is no requirement to withdraw a minimum amount if you are between ages 69 and 71.

EMPLOYEES

• Defer your bonus. Discuss with your employer the idea of delaying payment of your 2007 bonus until January 2008. This will defer the tax on the bonus to a future year.
  
  
• Negotiate a home office. Before year-end, negotiate with your employer the requirement to work from home more than half the time so that you’ll be able to deduct certain home office costs next year. Your employer will have to sign the Canada Revenue Agency’s (CRA) Form T2200 (Declaration of Conditions of Employment) as evidence of this requirement.

STUDENTS

• Make moving expenses deductible. If you’re a student who lives at least 40 kilometres away from home during the school year, be sure to claim moving expenses for your move to school. To be entitled to make a claim, you’ll have to earn some income while at school (a part-time job can do the trick, or a taxable scholarship, award or grant can count as income too). Also, claim expenses for your move home again in the summer (provided you earn income while back at home). You can deduct costs of travel, shipping and transportation of your belongings, and possibly meals and temporary lodging for up to 15 days, among other costs.
  
  
• Pay loan interest before year-end. Students are entitled to claim a tax credit for interest paid in the year (on or before December 31) on a qualifying student loan. The student can pay the interest or a person related to the student, but only the student is entitled to claim the credit. If the credit is not used in the current year, it can be carried forward for up to five years for use in the future.
  
  
• Claim foreign tuition. If you’re heading off to a school outside of Canada, you can still claim tuition and education credits on your Canadian income tax return. Be sure to have your school sign CRA Form TL11A “Tuition and Education Amounts Certificate – University outside Canada” (available from the CRA online at www.cra-arc.  gc.ca) and keep it on file in case the CRA wants to see it. Your school should sign and provide Form TL11A to you before year-end, or early in the new year. 

CORPORATE OWNERS

• Determine compensation mix. If you’ve taken certain amounts from the corporation in 2007, you’ll have to determine whether to classify these amounts as either salary, eligible or non-eligible dividends. Dividends are taxed more favourably than salary, however earning salary gives rise to RRSP contribution room. The optimal compensation mix will minimize the combined personal/corporate taxes of the individual and of the corporation, respectively. Speak to your accountant about the compensation mix most appropriate in your situation.
  
  
• Pay salaries to family. Splitting income may be easier when you own a corporation and a family member provides services to the corporation. Paying reasonable salary amounts before year-end means a deduction for the corporation, RRSP contribution room for your family member in 2008, and income splitting overall.
  
  
• Accrue salaries or bonuses. It’s possible to accrue salaries and bonuses so that they are deductible to your company at the company’s year-end, but defer payment of those salaries and bonuses by up to 179 days. This allows the amounts to be taxable to you personally in 2008 (when the payment(s) are received) thereby deferring the tax and lowering the tax burden, where tax rates are expected to be a little lower in 2008.
  
  
• Make a gift or award to an employee. It’s possible for an employer to give to an employee, on a tax-free basis, up to two non-cash gifts annually provided the aggregate cost of the gifts does not exceed $500 (including GST, PST and HST). In addition, up to two non-cash awards may be given to an employee on a tax-free basis, again provided the aggregate cost is not in excess of $500.  Consider making these gifts and awards before year-end to provide a tax-free benefit to employees, to boost morale, all the while still being deductible to the company. Be careful about exceeding the $500 limit on both gifts and awards, since the entire amount (not just the amount over $500) will then be taxable to the employee. 

FOREIGN CONNECTIONS

• Minimize foreign reporting requirements. Individuals, corporations, trusts and partnerships that own specified foreign property with a total cost over $100,000 at any time in the year may be required to file CRA Form T1135 “Foreign Income Verification Statement” with the tax collector. Taking steps before the end of the year to repatriate some of those assets could eliminate the requirement to file Form T1135 next year.
  
  
• Plan your electronic presence. Review whether or not your corporation might have an unexpected requirement to pay taxes in a foreign jurisdiction due to an electronic presence there. If so, consider taking steps to change the location of your electronic presence to reduce paying foreign taxes next year. Speak to a tax professional about the taxation of electronic or “e”-commerce.

 

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