If you live in Ontario and are looking for some excellent tax planning and management tips, continue reading.
Set up loans to your spouse
You can split income with a lower-income spouse by lending money to them. You’ll need to charge interest at the prescribed rate – currently just 2 per cent. Your spouse will have pay the interest by Jan. 30 each year for the prior year’s interest charge and can deduct that interest where the borrowed money is used to earn income. You’ll face tax on the interest you receive. Now, your spouse will pay all the tax – at a lower rate – on any income or capital gains earned with the borrowed money. Set up a loan by year-end to take advantage of this income-splitting strategy for 2020 and later years.
Transfer investments to family
Consider transferring investments to your 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 aged 17 or under in the year. Setting up an income-splitting strategy before year-end will ensure you receive the most in tax benefits for 2020 and later years. Since a transfer is a disposition of the investment for tax purposes, you should first calculate the tax cost of making the transfer.
Hire a family member
Do you have self-employment income? Consider hiring a lower-income family member to perform work for you, even before year-end. You’ll get a deduction for reasonable salaries or wages paid and your family member will be taxed on the amounts for 2019. What if you’re an employee? You can deduct wages paid to family if your employer requires you to hire your own assistant. Have your employer agree, in writing, that you’re required to hire someone at your own cost. Your employer will have to complete and sign Form T2200, and you should ensure your family member is actually doing the work they’re getting paid to do.
Contribute to an RESP
Although there’s no absolute deadline for contributing to a registered education savings plan, it’s always a good idea to make contributions each year to take maximum advantage of the Canada Education Savings Grant that’s available. Because of the way this grant works, you may receive more in grants by contributing over several years than by making fewer but larger contributions over a much shorter time.
Pay child-care expenses
Qualifying child-care expenses can be claimed on your tax return for 2019 if those costs are paid this year. Consider paying adult children (18 or older in the year) for any time during 2019 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).
Plan the timing of your move
You’ll face tax in the province in which you were resident on Dec. 31 each year. If you’re planning a move this year to a province with higher tax rates, consider delaying the move until January so that you can take advantage of the lower tax rates in your current province for one more year. Conversely, if you are moving to a province with lower tax rates, you may want to make that move before year-end.
Review family trust income
If you set up a family trust for purposes that may include income splitting, you should determine how much income was earned in the trust in 2019, and work with a tax professional to decide who should pay the tax on that income – the beneficiaries or the trust. It may be possible to have the beneficiaries pay the tax by making the income payable to them by year-end. Generally, you won’t want the trust itself to pay the tax since trusts are taxed at the highest rate going.
