The whiff of nutmeg, sprinkled atop a freshly-brewed eggnog latte, can only mean one thing — year-end tax planning season is upon us, once again.
While it’s true that the list of year-end tax planning tips doesn’t vary much from year to year, for 2017, there a few unique planning opportunities that are worth considering to save you some tax when you file your return next spring.
Tax loss selling
It may seem odd to talk about tax loss selling in a year in which many investors’ non-registered portfolios are generally up, but you may still be holding on to that “sure thing” penny-stock your great uncle tipped you off about a few years back that’s just about to rebound. If your patience is running out, now may be a good time to consider dumping that stock, doing some tax-loss selling to offset some of the gains you may have realized when you sold off some winners in 2017.
Tax-loss selling involves selling investments with accrued losses, typically at year end, to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.
In order for your loss to be immediately available for 2017 (or one of the prior three years), the settlement must take place in 2017. New for 2017, Canada has adopted a shorter settlement period for equity and long-term debt market trades, to coincide with a change to a “T+2” (trade date + two days) standard on U.S. markets. This means that, rather than the previous three-business-day settlement period, effective Sept. 5, 2017 trades are now settled in two business days. To complete settlement by Dec. 31, the trade date must be no later than Dec. 27, 2017, which, for the first time in Canada, puts your tax loss deadline after the Christmas and Boxing Day statutory holidays.
Note that if you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you think once you take the foreign exchange component into account. For example, Jake bought 1,000 shares of a U.S. company in November 2012 when the price was US$10/share and the U.S. dollar was at par with the Canadian dollar. Today, the price of the shares has fallen to US$9 and Jake decides he wants to do some tax loss harvesting, to use the US$1,000 (US$10 — US$9 = US$1 x 1,000) accrued capital loss against gains he realized earlier in 2017.
Well, before knowing if this strategy will work, he’ll need to convert the potential U.S. dollar proceeds back into Canadian dollars. At an exchange rate of $1 U.S. = $1.25 CDN, selling the U.S. shares for US$9,000 yields $11,250 CDN. So, what initially appeared to be an accrued capital loss of US$1,000 (US$10,000 – US$9,000) turns out to be a capital gain of $1,250 ($11,250 — $10,000) for Canadian tax purposes. If Jake had gone ahead and sold the U.S. stock, he would actually be doing the opposite of tax loss selling and accelerating his tax bill by crystallizing the accrued capital gain in 2017.
First-Time Donor’s Super Credit
This is the last year that you can claim the federal First-Time Donor’s Super Credit (FDSC) if neither you nor your spouse or common-law partner has claimed the donation tax credit from 2008 to 2016. The FDSC provides an additional 25 per cent tax credit on total monetary donations up to $1,000. This is on top of the federal and provincial donations tax credits.
For cash donations up to $200 in a year, the federal donation credit (15 per cent) combined with the 25 per cent FDSC is worth 40 per cent of the donation amount. For total cash donations between $200 and $1,000 this year, the federal donation credit (29 per cent) plus the 25 per cent FDSC bring the federal credit to 54 per cent of the donation amount. Add to this your provincial donation credits, and the total tax credits could be around 70 per cent, depending on your province of residence. That means your out-of-pocket cost to donate $1,000 could be as low as $300.
While you may not be a first-time donor, perhaps your kids qualify as first-time donors if they recently graduated and started earning income for the first time. In prior years’ returns, they may never have claimed a donation since they weren’t taxable after claiming the basic personal amount and the tuition, education and textbook tax credits.
Finally, small business owners may want to take action prior to Jan. 1, 2018 if your corporation could be caught by the proposed anti-dividend-sprinkling rules. The new rules would look at whether income received, typically in the form of dividends, by a related adult shareholder is “reasonable,” taking into account the person’s labour and capital contributions to the business along with any previous returns and remuneration, in comparison to a situation where an arm’s length investment was made.
If your private corporation has other shareholders, such as your spouse, partner, or other adult relatives as shareholders, consider whether it makes sense to pay additional dividends to family members who are in lower tax brackets in 2017 to get one last kick at the can and maximize any income sprinkling opportunities before any proposed rules could increase the tax rate on such income beginning in 2018.
You may also wish to review the share structure of your private corporation to determine if more than one shareholder own shares of the same class. Corporate law might require you pay the same amount of dividends to all shareholders of the same class of shares. If you cannot pay dividends to one shareholder without causing another shareholder to be taxed at the highest tax rate on dividends received by them, you may wish to consider a corporate reorganization so that the shareholders own shares of different classes.