Individuals are taxed on a calendar year basis and December 31st is quickly approaching. Here are some tax considerations to keep in mind as we enter the final weeks of 2013.
Personal Tax Brackets
An important component of year-end tax planning is keeping in mind your expected personal tax bracket. For 2013 the Federal tax brackets are:
$0 to $43,561 15%
$43,562 to $87,123 22%
$87,124 to $135,054 26%
$135,055 and greater 29%
Maximizing the amount of money in your pocket can be done by reaching without exceeding your current tax bracket. For example, a self-employed individual earning $60,000 who wishes to take out additional cash from the business can do so as a salary, bonus or dividend. Provided the total compensation doesn’t exceed $87,123, the additional cash would continue to be taxed at 22% and the percentage of income remaining in his or her pocket is unchanged.
All charitable donations must be made by December 31st in order to claim them as a credit on your 2013 tax return. The first $200 of donations receives a federal credit of 15% with each additional dollar receiving a 29% credit. Keep in mind that you can delay claiming your charitable donations for a period of up to five years. Doing so can help push more of your donations in to the 29% credit base, earning you an additional 14 cents on every dollar.
New in 2013 is the “First Time Donors Super Credit” for individuals and households who have not claimed a charitable donation in the past five years. With fewer and fewer individuals making donations to registered charities, the Federal government has stepped in to sweeten the pot. For those who qualify for the FTDSC, the first $200 in donations will receive a credit of 40% and on the remainder, up to $1,000, a 54% credit.
Dividends represent the after-tax earnings of a corporation to its shareholders and are an effective way of compensating owner-managers. Since this income was already taxed at the corporate level and is then again taxed in the hands of the individual shareholder, the Government of Canada has provided an element of tax relief to individuals receiving dividend income. The majority of small businesses in Canada benefit from reduced tax rates which means they pay out “Non-eligible dividends”.
Starting in 2014, the top combined federal/provincial marginal tax rates on non-eligible dividends will be increasing between 1% and 4.3%, as shown below:
|Prince Edward Island||38.6%||40.0%||1.4%|
This change is quite significant for business owners. Owner-managers who would like to pay themselves dividends should consider doing so by the end of 2013 as each $10,000 in dividends in 2014 will be taxed $100 to $430 more.
A common consideration at year end is to sell off under-performing marketable securities, also known as tax loss selling. The intent of this is to offset capital gains you would otherwise be taxed on come the end of the year and to free up capital for new (and, potentially, more profitable) investments. As the stock transaction must settle before the end of the year, all trades are recommended to occur by December 24th to account for business closures during the holidays.
However, keep in mind the “superficial loss rules” whereby a security sold at a loss is subsequently denied by CRA. This occurs when the security is not completely sold from his or her portfolio and/or is later repurchased by the individual, the person’s spouse or a company the person owns within 30 days of the sale, and the security continues to be held in his or her portfolio on the 30th day.
If you are planning to engage in any stock transactions before the end of the year that have an accrued gain, it is typically advised to wait until the new calendar year. Doing so will delay the tax bill on the capital gain for an entire year – until your 2014 taxes are due on April 30, 2015. You may consider going through with 2013 capital gain transactions, however, to maximize your current tax bracket or for other reasonable tax planning reasons.
For those individuals who have turned 71 in 2013, you can make your final RRSP contribution this December but, by the end of the year, you are required to convert this account to a Registered Retirement Income Fund (“RRIF”) or registered annuity.
If you are considering applying for early Canada Pension Plan (“CPP”) benefits, you should do so before the end of the year. For individuals between 60 and 65 who would like to start an early withdrawal of their CPP, the “downward monthly adjustment factor” will increase from 0.54% to 0.56% in 2014. This means that for each month you receive CPP prior to age 65, your total benefit is reduced by 0.54% per month with a higher penalty occurring starting in 2014. These changes are, as intended, making it less advantageous to start receiving CPP before age 65.
However, individuals who delay receiving their CPP once they reach the age of 65 will receive an additional 0.7% (the “upward monthly adjustment factor”) for each month he or she waits, with no further increase per month once the individual reaches age 70.