Important Year End Tax Considerations as We Approach the End of 2019

As we approach the end of 2019, there are a number of important tax-related items to consider. Here are a few of them:

Income splitting techniques

• Income-splitting loans: funds can be lent to a lower-income family member at the prescribed rate of interest (set by Canada Revenue Agency – for 2019 the rate is 2%) who would then invest the money and earn investment income. As long as the interest is paid before the 30^th of January in the following year, the investment income will continue to be reported by the lower income family member. The interest income is reported by the “lender” family member and a deduction can be claimed by the “lendee” against the investment income.
• Spousal RRSPs: the higher income spouse can make contributions to these types of plans and benefit from the deduction at a higher marginal rate. After three years, the lower income spouse can withdraw funds (if needed) and pay little or no tax.
• Canada Pension Plan (CPP) payments: if you receive CPP payments, consider splitting the CPP income with your spouse.

Tax deductible or tax credit expenses

• Tax deductible expenses: many of these expenses, such as interest and childcare costs can only be deducted in a tax return if they have been paid by the end of the calendar year.
• Tax credits: likewise, many of these types of expenditures (donations, medical expenses, tuition) must also be paid in the year in order to claim the credit in your personal tax return.
• Unused tuition from prior years: these should be noted on your previous year’s Notice of Assessment and can be claimed going forward.
• Tax planning: consider whether a deduction or credit would be worth more in this year or next, if it is possible to control the timing of the expenditure. There may be expected changes in income level and tax bracket, resulting in a planning opportunity.

Tax-sheltered investments

• Tax-free savings account (TFSA): consider making a contribution for 2019 and possibly catch up on prior non-contributory years. While there is no deduction for the contribution, the earnings in the invested funds are not taxable. Consider making your contribution in January each year, to maximize the tax-free earnings.
• TFSA withdrawals and re-contributions: TFSA withdrawals are tax free and any funds withdrawn in the year are added to the contribution room in the following year. If you have no available contribution room and are wanting to make a withdrawal, consider doing before the end of 2019 so that you can re-contribute in 2020 without affecting your 2020 contribution limit.
• Registered retirement savings plans (RRSPs): in order to be deductible against your 2019 income, contributions must be made by February 29, 2020, however consider contributing as early as possible to maximize growth potential. For tax planning purposes, if you expect to be in a higher tax bracket in 2020 or beyond, consider contributing as early as possible but holding off on taking the deduction until you are in a higher tax bracket. Remember to always check your contribution limit before making your contribution.
• RRSPs at age 71: if you turn 71 in 2019, your RRSP must be wound up before the end of the year. Consider making a contribution before December 31^st. Spousal contributions can continue until the end of the year in which your spouse turns 71 if you have unused RRSP contribution room. If you plan on making the maximum contribution you are allowed, and you also had earned income in 2019 which would generate contribution room for 2020, in the absence of a spousal RRSP, consider over-contributing to your plan in December 2019. The over-contribution should be deductible against your 2020 income. The over-contribution will be subject to a 1% penalty for the month of December, but the tax savings may make it worthwhile.

Education savings