As you consider your financial priorities for the coming year, here are some resolutions that could help you save taxes, increase your net worth, and position you for financial success in 2018.1. Start tax planning for 2018
Many investors wait until year end before thinking about how to reduce their annual tax bill. As a result, they often miss out on available tax planning opportunities. Tax planning should be a year round activity in order to maximize the savings opportunities available to you. Ask your BMO financial professional for a copy of our 2018 Personal Tax Calendar, which summarizes important tax deadlines and provides some tax planning tips for you to consider throughout the coming year.
2. Make your RRSP and TFSA contributions
Making regular Registered Retirement Savings Plan (RRSP) contributions is one of the best ways to ensure you save enough for your retirement. The deadline for making your 2017 RRSP contribution is March 1, 2018. If you’ve already made your 2017 RRSP contribution, consider making your 2018 RRSP contribution early, instead of waiting until 2019, in order to maximize the tax deferred compounding inside your RRSP. The maximum RRSP contribution available for 2017 is $26,010 and $26,230 for 2018. The benefits and flexibility provided by a Tax-Free Savings Account (TFSA) make it ideal for saving for multiple financial goals.
The TFSA contribution limit for 2018 is $5,501 . Unused contribution room – dating back to 2009 when TFSAs were first introduced, or the year you turned 18 – carries forward and can be used in a future year.
You may want to consider gifting funds to your spouse or common-law partner, or adult children to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). Income earned within their TFSA will not be attributed back to you.
3. Reduce tax with income-splitting
Under our tax system, the more you earn, the more you pay in income taxes on incremental dollars earned. With this in mind, it may make sense to spread income among family members who are taxed at lower marginal rates in order to lower your family’s overall tax burden, subject to the income attribution rules. Some of the more common income-splitting strategies to consider include :
• An interest-bearing loan at the prescribed interest rate to family members in a lower tax bracket. This strategy is particularly attractive because rates are currently at historically low levels ;
• Pension income-splitting between spouses (or common law partners);
• Gifts to adult children or other adult family members (other than a spouse or common-law partner); and
• Gifts to a minor child – directly or through a trust structure – to acquire investments that generate only capital gains.
4. Reduce the amount of withholding tax from your paycheque
While many consider an income tax refund to be a windfall of sorts, a refund means you’ve given the government a tax-free loan during the year. A tax refund usually occurs because the income taxes that are withheld by your employer exceed your actual tax liability. Income tax withholding rates are an estimate of the taxes you will owe for the year if your only income source is the one upon which the taxes are being calculated. Withholding rates do not take into consideration all income tax deductions and credits such as RRSP contributions, deductible support payments or charitable donations. This can result in an overpayment of tax during the year and provide a refund when you file your tax return.
If you would like your employer to reduce the amount of withholding taxes from your earnings, you can make a request, in writing, to your Regional Taxation Services Office of the Canada Revenue Agency (CRA) and/or Revenu Québec (RQ). You will need to include documentation to support your request, such as RRSP contribution receipts or a written court order for support payments. If approved by the CRA and/or RQ, your employer will receive a letter of authorization to reduce the withholding taxes on your employment income. The reduced withholding taxes mean you will improve your cash flow during the year by increasing your net take home pay, instead of receiving a lump-sum tax refund the following year when you file your tax return.
5. Make your charitable giving tax efficient
The benefits of making a charitable donation are countless, from helping those in need to the personal satisfaction you feel when giving something back to a cause you feel passionate about. However, with proper planning, you can also reduce your income tax liability and maximize the value of your donation. A donation of qualifying publicly-traded securities may be preferred over a cash donation of equal value, particularly in cases where you have already decided to dispose of the securities. A charitable tax receipt equal to the fair market value of securities donated to a charity will reduce your taxes through a donation tax credit.
For donations made after 2015 that exceed $200, calculation of the federal charitable donation tax credit will allow higher income donors to claim a federal tax credit at a rate of 33% (versus 29%), but only on the portion of donations made from income that is subject to the new 33% top marginal tax rate that came into effect on January 1, 2016 . When combined with the provincial donation tax credit, the tax savings can approximate 50 per cent of the value of the donation (depending on your province of residence). A donation of securities is considered a disposition for tax purposes; however, because of the tax incentives provided on a donation of qualifying appreciated publicly-traded securities to charity, the capital gain inclusion rate is nil instead of the normal 50 per cent that would otherwise apply. You should also consider combining all charitable donations for you and your spouse and claim these on one income tax return for maximum tax savings.
If you’d like to be more strategic with your charitable giving, consider establishing a donor advised fund through the BMO Charitable Giving Program. You can make a charitable contribution to your donor advised fund and obtain the tax savings benefits today, while having the flexibility to make disbursements to your designated charitable beneficiaries over time; ensuring a legacy of giving long into the future. A variety of assets are accepted for contribution in order to establish your donor advised fund, or when making additional contributions, including publicly-traded securities.