Another year seems to have flown by and we are in the midst of a holiday gift hunt. So, with that holiday spirit in mind, here are some last-minute tax planning tips to cut your 2022 tax bill. next month is sure to fly if this year is any indication.
Last minute income distribution
Lower family income splitting is always a good way to cut your tax bill. The following are income splitting strategies that may be useful at the end of the year:
You can share the income with the lower family members by lending them (for example, spouse, partner or children under 18 years old), if selected by CanRev’s “service fee” loan – the rate is adjusted quarterly (currently 3 percent for the last quarter of 2022). Interest must be paid within 30 days of the end of the year, otherwise the “contribution rule” may apply and the income will be taxed in your hands. Make sure interest payments are properly recorded, for example, by checks deposited into your account.
Sometimes, you may want to volunteer your grammar. For example, if the investment results in a loss (which may happen this year), it may allow you to claim Vol. 40, no. 12 Guide to Tax Saving Strategies December 2022 TAX STRATEGIES New Year’s Tax Planning and the Spirit of Giving Samantha Prasad LL.B. them on your return. In this case, the scheme’s strategy may be to intentionally miss the interest payment period. However, if this is done once, the “designated loan” exemption will no longer apply to investments made from that loan through “advances”. As a result, you may have to start over with a new indexed loan (and who knows what the indexed rate will be then).
If you have a family trust and want to ensure that the beneficiaries are taxed at a lower rate of tax on the income distributed to the trust, the income must be paid or paid to the end of the calendar year. If there is no actual payment, a promissory note or other proof that there is a legal obligation to pay should be submitted. If the money is actually paid, make sure it is paid to the actual beneficiary and deposited into their account. A good trust document should also be filed showing income or payments to specific beneficiaries.
The senior spouse should pay all household expenses (including the lower spouse’s income tax), allowing the lower spouse to use his or her own money. Investment income is taxed on the spouse’s lower tax return – that is, at a lower tax rate.
Married couples can share CPP benefits. Consider splitting CPP if one spouse/partner has a very low income, which can result in tax savings.
Married couples age 65 or older can collect their own retirement income. To do this, both the recipient of the pension income and the spouse must agree to the distribution of the tax return for the year in question.
Interest tax is deferred
The Income Tax Act allows tax deferral on interest-bearing investments for one year after their purchase, unless the amount is paid or credited to the taxpayer’s account. interest during that time. Therefore, for investments that have deferred interest payments (for example, once or twice a year), it may make sense to make the purchase at the beginning of the new year, but not at the end of the current year, to get at least Part of the interest payment will be “issued” in the following year.
Resulting in a loss before the end of the year
If you are holding an investment that is in a position of loss, and you expect to get another profit in 2022 from another investment, consider if now is the time to dump the “loser stock”. This can cause capital losses to offset any other gains in your portfolio.
Even if you have no current capital gains in 2012, capital losses can be carried back three years to offset previous capital gains, so this strategy is still relevant. if you have benefits in 2021, 2020 or 2019.
Claiming an Allowable Business Loss (ABIL)
While capital losses can only be used to reduce income, 50 percent of ABIL can be used to reduce any type of income. Therefore, if you are a shareholder or creditor of a failed private company, consider selling your shares or debt at the end of the year.
To claim ABIL, the investment must be in a private Canadian company. The general rule is that, at the time of the bankruptcy sale, the company must be a “small business” – CanRev requires that 90 percent or more (in value) of the company’s assets must be used generally in active companies. made mainly in Canada. One last limitation: The loss reverts to normal loss if you have claimed the capital exemption in the previous year.
To claim ABIL, the sale must not be made to a person who is not “at arm’s length”. This means that you cannot sell to a person related to you for tax purposes, including a spouse or partner, children or grandchildren, siblings, or controlled entities, for example. There is also a test: It is possible for CanRev to say that the buyer does not deal with you if you are a mind to manage or work with the buyer. Therefore, if there is a lot of loss, you have to be careful. (Otherwise, the loss may be found in the situation where the company has left).
Keep in mind that if the investment was made through a loan from a company that you control (or are considered “connected” under the income tax law) , then that loan should be interest. Otherwise, you will not get ABIL.
And if you’re wondering why I’m going to focus on the technique, it’s because ABIL claims are often put under the microscope by CanRev. At the very least, you should expect a response to your claim from CanRev – standard questions are often sent to you asking for details about your investment, and also asking you to support the company’s status as a “small business”. So before you decide to claim ABIL, make sure your ducks are in a row.
Be kind and give
If you’re hoping to have another source of income in 2022, then during this giving season, consider making a donation to a registered charity. Not only will you spread the wealth to those in need, but you’ll also create a tax credit to offset other income. So, with this strategy, everyone benefits!
First published by The TaxLetter
The content of this article is intended to provide general guidance on the subject. You should seek advice specific to your particular circumstances.