Early 2018 Tax Tips
Many investors are aware of the importance of tax planning near the end of
the year to minimize their income tax liability. However, often-neglected areas
of tax planning include meeting the important deadlines for implementing
tax planning strategies that may only be available early in the new year. The
purpose of this article is to summarize some of the strategies that have
deadlines in early 2018.
2017 RRSP contribution deadline
The deadline for you to make
a contribution to a registered
retirement savings plan (RRSP) that
can be claimed as a 2017 RRSP tax
deduction is generally the 60th day
after the year-end, which falls on
Thursday, March 1, 2018.
If you do not have sufficient cash on
hand to make an RRSP contribution,
you can consider making an in-kind
contribution of eligible securities
from your non-registered account
to your RRSP or to a spousal RRSP.
Be aware that you may not want to
contribute a security in-kind that is in
a loss position as your ability to claim
that loss will be denied.
Also, depending on your specific
circumstances, it may make sense to
borrow funds to catch up on unused
RRSP contributions or to fund this
year’s contribution. It is important
to note that using borrowed money
to finance a purchase of securities
involves greater risk than a purchase
using your existing resources. Your
responsibility to repay the loan and
pay interest as required by its terms
remains the same even if the value
of the securities you purchased
declines. Remember that interest
paid on money borrowed to make an
RRSP contribution is not deductible
for tax purposes.
2018 RRSP contribution room
It is generally a good idea to
contribute to your RRSP as soon as
possible to maximize the tax-deferred
growth in your plan and to avoid the
stress of trying to meet a last minute
deadline. January 1st is the earliest
day you can make a 2018 RRSP
contribution using the new room
that is created from your prior year’s
earned income without triggering an
over-contribution penalty.
If you wish to make an RRSP
contribution early in the 2018
calendar year, you may need to
estimate your 2018 RRSP deduction
limit. This is because you may not
have received your 2017 notice of
assessment (NOA) which provides
a statement of your 2018 RRSP
deduction limit. To estimate your
2018 RRSP deduction limit, take 18%
of your previous year’s (2017) earned
income up to the RRSP dollar limit
of $26,230 for 2018, and subtract any
2017 pension adjustment.
If you did not use your
contribution room in
a previous year, the
unused room is carried
forward indefinitely.
Tax-Free Savings Account (TFSA)
Consider making a contribution to
your TFSA early in the 2018 calendar
year to maximize the tax-free growth
in your plan. The TFSA contribution
limit was $5,000 per year for the years
2009 to 2012, $5,500 for 2013 and
2014, $10,000 for 2015 and $5,500 for
2016, 2017 and 2018. If you have been
eligible to open a TFSA since 2009 and
have not yet contributed to one, your
contribution limit would be $57,500
as of January 1, 2018.
If you did not use your contribution
room in a previous year, the unused
room is carried forward indefinitely.
In addition, if you withdrew an
amount (that is not a withdrawal
of excess TFSA contributions) from
your TFSA in 2017 or prior years,
you can re-contribute this amount
to your TFSA as of January 1, 2018.
Be extra careful to calculate your
room properly when re-contributing
to your TFSA as the CRA can charge
penalties for over-contributions.
If you do not have sufficient cash on
hand to make a TFSA contribution,
you can consider making an in-kind
contribution of eligible securities
from your non-registered account
to your TFSA. As with RRSPs, if you
contribute securities that are in a loss
position, you will not be able to use
the loss to offset your capital gains.
Family income splitting loans
A potential way to split income with
family members involves setting
up a prescribed rate loan with your
spouse, adult family members, or
minor children through a family trust.
If you previously set up a prescribed
rate loan, it is critical that the annual
interest on the loan be paid on or
before January 30, 2018.
If you miss the January 30th deadline,
attribution may apply to you, the
lender, for the 2017 taxation year
and all future years that the loan is in
place. This would defeat the purpose
of setting up such an income-splitting
strategy since the income and/or
capital gains may be taxed in your
hands. Make sure that your spouse,
your other family members or family
trust actually issues a payment from
their account to yours for the interest
payment. A cashed cheque may
provide evidence that the interest was
paid and received by you.
Eligible retiring allowance
If you received a retiring allowance
in 2017, you have until March 1,
2018 to transfer the eligible portion
to your own RRSP without affecting
your RRSP contribution room. Your
eligible retiring allowance cannot be
transferred to a spousal RRSP. This
transfer will allow you to defer taxation
on the eligible retiring allowance
received until it is withdrawn from
your RRSP in the future.
Unlike regular unused RRSP
deduction room that you can
carry forward each year, if you do
not transfer your eligible retiring
allowance by March 1, 2018, you will
lose the opportunity to do so forever.
That said, if your eligible retiring
allowance is paid to you over two
years, for example in 2017 and 2018,
you will still be able to transfer the
portion received in 2018 to your RRSP
any time in 2018 or early in 2019.
Labour-Sponsored Venture Capital
Corporations (LSVCCs)
A strategy for reducing your 2017
income tax liability after the year-
end is to consider purchasing
approved shares of LSVCCs. If you
are the first registered holder of the
approved share, you may be able to
take advantage of the 15% federal
tax credit on investments up to
$5,000 per year. This translates into a
maximum federal annual tax credit
of $750. An additional provincial
tax credit may also be available
depending on your province or
territory of residence and the type of
approved share you purchase. You can
purchase LSVCCs in your registered
and non-registered accounts.
If you purchase a LSVCC at the
beginning of the year, the CRA allows
you to report the credit on your
previous year’s tax return. If you
do not report all or a portion of the
amounts on your 2017 return, you
are allowed to carry them forward
and claim them on your 2018 return.
For example, if you acquired $8,000
of approved stock between January
1, 2018 and March 1, 2018, you are
allowed to report $5,000 of that
amount and claim the $750 credit on
your 2017 income tax return. You are
also allowed to report the remaining
$3,000 on your 2018 return and claim
a $450 tax credit for that year.
The tax advantage of purchasing
a LSVCC must be weighed against
the investment merits (generally
higher risk) and the requirement
to hold the investment for a set
time period, often eight years. If the
shares are sold before this holding
period has expired, you may need to
repay the total amount of tax credits
you received. Speak with your RBC
advisor to determine if an investment
in a LSVCC is suitable for you.
Locked-in plan conversion
If you have a locked-in plan such as a
locked-in retirement account (LIRA)
or a locked-in RRSP and are planning
to convert it to a life income fund (LIF)
or restricted life income fund (RLIF)
in 2018, you may want to consider
doing so in January 2018, rather than
later in the year. This is because the
maximum payment available in the
first year of the plan may be prorated
based on the months remaining in
the current year, with any part month
being equal to a full month depending
on which jurisdiction governs your
locked-in plan. As such, converting
to a LIF or RLIF in the first month of
the year may allow you to ultimately
withdraw more funds for that first
year. No proration is required in
the first year for an Alberta, British
Columbia, Manitoba, New Brunswick,
or Quebec LIF.
Note that in the calendar year when
the locked-in plan is converted to
a LIF or RLIF, there is no minimum
payment that must be withdrawn.
Fixed income purchases
When you purchase interest accruing
securities, such as T-Bills or strip
bonds, in a non-registered account,
consider purchasing ones with a
January maturity date to maximize
the tax-deferral on interest accruals.
Even though you only receive the
proceeds when you sell the security
or the security matures, the Canadian
tax rules require that you report the
accrued interest annually based on
the anniversary date of the security.
The anniversary date is every calendar
year on the day before the issue date.
For example, a strip coupon issued
on January 16, 2018 has its first
anniversary on January 15, 2019.
Assume you purchase that strip
coupon on January 16, 2018 with a
January 16, 2021 maturity date. You are
required to report the accrued interest
from January 16, 2018 to January 15,
2019 on your 2019 income tax return.
Since you purchased the fixed income
instrument after the anniversary date,
you have no interest to report in 2018,
the year of purchase.
Ensure that the tax advantages of
timing your non-registered account
fixed income purchases do not
override the investment merits of the
fixed income instrument.
Mutual fund purchases
When you purchase a mutual
fund part way through the year,
your purchase price includes any
accumulated income and gains
that have not yet been distributed.
When the fund makes a distribution,
the distribution includes these
accumulated earnings and is fully
taxable even though you purchased
the accumulated earnings with
your after-tax dollars. One way to
avoid receiving this distribution is
to simply purchase the fund after
the distribution date. If you delayed
purchasing mutual funds last year
to avoid the year-end distributions,
consider purchasing mutual funds
now, in the new year. Review your
portfolio with your RBC advisor
to determine if the mutual fund
purchase makes sense for you.
Business owners
Paying a bonus
If your corporation declared a
bonus in 2017, remember to pay
that bonus within 179 days after the
corporation’s year-end. Canadian tax
rules allow a corporation to deduct
a bonus declared to an employee on
the corporation’s previous year’s tax
return as long as the bonus is paid
within 179 days after the corporation’s
year-end. The employee must report
the bonus on their personal tax return
in the year they receive the bonus.
For example, assume your
corporation has a December 31, 2017
year-end. It can pay you a bonus in
January 2018 for services rendered
in 2017. Your corporation can deduct
this bonus on its 2017 corporate tax
return and you will report this bonus
on your 2018 tax return.
T4 Filing Deadlines for Employers
If you have employees in your business
or you employ a nanny or babysitter,
you must file the appropriate T4
forms to the CRA by February 28,
2018. A copy of the T4 slip must
also be delivered or mailed to your
employee(s) by this date. If you, as an
employer, fail to file the appropriate T4
forms to the CRA by this deadline, you
may be subject to penalties.
Sale of private company shares
You may have disposed of “qualified
small business corporation” shares
in 2017 and realized capital gains
that cannot be fully exempt under
the $835,716 lifetime capital gains
exemption. If this is the case, you may
be able to defer all or some portion of
the taxable capital gain if you reinvest
the proceeds in a new eligible small
business corporation any time in the
year of disposition or within 120 days
after the end of that year. As these
deferral rules are complex, consult a
qualified tax advisor if you intend to
explore this option.
Deadline for corporate taxes
Generally, corporate taxes are due
two months after the corporation’s
year-end. If your corporation’s year-
end is December 31, 2017, you will
need to pay the remainder of the tax
your company owes by February 28,
2018. The corporate taxes can be due
three months after the corporation’s
year end (March 31, 2018) in certain
circumstances.
Conclusion
This article covers some common
tax planning strategies that you may
want to consider early in the new
year. For more information on any of
these topics, please speak with your
RBC advisor or a qualified tax advisor.
This article may contain several
strategies, not all of which will
apply to your particular financial
circumstances. The information in
this article is not intended to provide
legal or tax advice. To ensure that
your own circumstances have been
properly considered and that action is
taken based on the latest information
available, you should obtain
professional advice from a qualified tax
and/or legal advisor before acting on
any of the information in this article.
