2018 year-end tax planning - Opportunities to reduce your 2018 tax bill - RBC Wealth Management
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INVESTMENT, TAX AND LIFESTYLE PERSPECTIVES FROM RBC WEALTH MANAGEMENT SERVICES
2018 year-end tax planning
Opportunities to reduce your 2018 tax bill
As year-end approaches, taking some time to review your financial affairs may
yield significant tax savings. To ensure that you leave no stone unturned, we
have summarized some common year-end tax planning strategies in this article.
Lendra Latham Tax loss selling settlement. Check with your advisor
Vice President and Investment Advisor for mutual fund settlement dates.
If you have realized capital gains
lendra.latham@rbc.com
613-345-7669 during the year, and you are holding
Superficial loss rules
securities with unrealized losses,
consider selling those securities to In order to ensure that your capital
Joanne Chisamore loss can be claimed, you must be
realize the losses. This strategy of
Associate aware of the superficial loss rules.
selling securities at a loss to offset
joanne.chisamore@rbc.com A superficial loss will occur when a
613-345-7018 capital gains realized during the year
is a year-end tax planning technique security is sold at a loss and both of
commonly known as tax loss selling. the following occur:
82 King St. W.
Review your portfolio with your i) During the period that begins
Brockville, Ontario
Please
K6V 3P9 contact us RBC advisor to determine if any 30 days before and ends 30 days
www.lendralatham.com investments are in a loss position after the settlement date of the
for more information and no longer meet your investment disposition, you or a person
1-800-567-0533
about the topics objectives. If the investment still has affiliated with you (i.e., your
discussed in this strong fundamentals and meets your spouse, a company controlled by
investment needs, consider all costs, you and/or your spouse, or a trust
article. including transaction costs before in which you and/or your spouse
selling investments solely for the are a majority interest beneficiary)
purpose of triggering the tax loss. acquires the identical property that
was sold at a loss.
When disposing of a security, the sale
for Canadian tax purposes will be and
deemed to have taken place on the ii) At the end of that period (i.e., on
settlement date. Assuming a two-day the 30th day after the settlement
settlement period, in order to utilize date of the disposition), you or a
the tax loss selling strategy for the person affiliated with you owns or
2018 tax year, transactions must be has a right to acquire the identical
initiated by December 27, 2018 for property.
both Canadian and U.S. securities in
order to settle during 2018. Canadian You need to look at your holdings
and U.S. option transactions have a across all accounts when determining
one-day settlement, therefore, option if the superficial loss rules apply.
transactions must be initiated by For example, if you purchase
December 28, 2018 to ensure a 2018 mutual funds on a pre-authorized
2 | RBC Wealth Management
contribution plan, be sure to check Canada Revenue Agency (CRA) by
all of your accounts to make sure you April 30, 2019. Realizing capital
are not buying the same mutual fund gains at the beginning of 2019
you are selling (in a different account means that any tax payable would
perhaps) for tax loss purposes not have to be paid until April 30,
within the 60 days that may trigger a 2020 (unless you are required to
superficial loss. make tax instalments); and,
Receiving a bonus Carry forward and carry back of c) If you have net capital losses in
prior to year-end capital losses 2018, you can carry back those
creates additional A capital loss must first be applied losses against previously realized
against any capital gains (including capital gains in 2015, 2016 and/
Registered Retirement
capital gain distributions from mutual or 2017. However, before losses
Savings Plan (RRSP) can be carried back, they must
funds) you realize in the current year.
contribution room for first be used to offset capital gains
Once the capital gains of the current
2019 if you have not yet year have been offset, the balance of in the current year. Therefore,
reached the maximum the loss can be either carried back realizing capital gains at the end of
2019 RRSP limit. three years (to capital gains realized 2018 would reduce the amount of
in 2015, 2016, or 2017) or carried capital losses you could carry back.
forward indefinitely to offset future
years’ capital gains. When you carry As always, the investment merits of
back a net capital loss to a previous deferring the sale of a security to the
year’s taxable capital gain, it will following year must first be considered,
reduce your taxable income for that before looking at the tax benefit.
previous year. However, your net
Year-end bonus planning
income, which is used to calculate
certain credits and benefits, will not Receiving a bonus prior to year-
change. Note that this is the last year end creates additional Registered
in which you can carry back your Retirement Savings Plan (RRSP)
losses to 2015 and offset them against contribution room for 2019 if you
your 2015 capital gains. have not yet reached the maximum
2019 RRSP limit. Furthermore,
If you plan on triggering a capital loss receiving a bonus prior to year-end
in a corporation, you should speak to may also allow greater employee/
your qualified tax advisor as it may employer pension contributions
be advantageous to pay out a capital and/or employee profit sharing
dividend if your capital dividend plan contributions for 2019, if these
account is positive, prior to triggering contributions are based on the prior
the loss. year’s total compensation.
Capital gains deferral On the other hand, if you expect to
As we approach the end of 2018, if be in a lower tax bracket next year,
you currently have unrealized capital consider deferring the receipt of your
gains you may want to consider bonus (if your employer permits) to
deferring the realization of capital early 2019.
gains until 2019 for the following
If the bonus is paid directly to you,
reasons:
there will be withholding taxes
a) Your marginal tax rate may be at source on the bonus payment.
lower in 2019 than in 2018; However, if your employer permits,
some or all of the withholding taxes
b) Realizing capital gains at the end on the bonus may not have to be
of this year means that any tax withheld if the bonus or a portion of
payable associated with the gains the bonus is transferred directly to
would have to be remitted to the your RRSP. You must have adequateRBC Wealth Management | 3
unused RRSP deduction room in the CRA tax instalment statements. If you
year of transfer. underestimate your tax instalments
for the current year based on your
Low-income year own calculation, you could be
If you expect to be in a low marginal subject to interest and penalties for
tax bracket for 2018 and expect to be not paying the full amount that is
in a much higher marginal tax bracket indicated on the CRA tax instalment
in retirement, you may want to reminder statements.
consider making an early withdrawal
from your RRSP before year-end. Charitable donations
The advantage of this strategy is that Making a charitable donation is one
you can avoid a higher tax rate on of the ways that you can significantly
these RRSP funds if withdrawn in the reduce the personal tax you pay. The
future when your marginal tax rate final day to make contributions to a
If you have not yet done so, may be higher. If you can reinvest registered charity in order to claim
you can make your TFSA the RRSP funds withdrawn in your the donation tax receipt on your
non-registered account, you can take 2018 income tax return is December
contribution for 2018 (up to
advantage of the preferred income tax 31, 2018.
$5,500) and catch up on any
treatment on capital gains, Canadian
unused contribution room dividends and return of capital. As an alternative to cash, you can
from 2009-2017. Furthermore, if you can reinvest the also donate publicly listed securities
RRSP funds withdrawn in your Tax- in-kind to qualified charities without
Free Savings Account (TFSA), you do being subject to tax on the realized
not pay any future tax on the income capital gain. You will receive a
earned or capital gains realized. donation tax receipt equal to the fair
The drawback of this strategy is a market value of the security at the
prepayment of income tax and lost time of the donation, which can help
tax deferral on the growth of the RRSP reduce your total taxes payable.
funds withdrawn.
If you plan on donating securities
Tax instalments in-kind, the transfer must take place
before year-end, so ensure you start
If you are required to make quarterly
this process well in advance to allow
tax instalment payments to the
for processing and settlement time,
CRA, you should make your final
typically at least five business days.
payment on or before December 15,
Also, be sure to verify that the charity
2018 to avoid late interest charges.
organization is willing to accept such
If you missed an earlier instalment
in-kind donations.
payment deadline, you may want
to consider making a larger final
TFSA contributions
instalment payment or make your
If you have not yet done so, you can
final instalment payment earlier than
make your TFSA contribution for
the December 15, 2018 deadline to
2018 (up to $5,500) and catch up on
minimize late interest charges.
any unused contribution room from
You may have the opportunity 2009-2017. The TFSA enables you
to reduce or defer your tax to earn tax-free investment income,
instalment liability by switching the including interest, dividends, and
method you use to calculate your capital gains, which may result in
instalments. For example, it may greater growth compared to a regular
be more advantageous to base your taxable account. You can make
instalments on the current year’s tax-free withdrawals at any time,
estimated taxes, rather than on taxes for any reason, and any amount
owing for the prior year. However, you withdraw is added back to your
you must be careful when paying less available contribution room on
than the amount indicated on the January 1st of the following year.4 | RBC Wealth Management
If you are thinking of making a If you have already made the
withdrawal from your TFSA in the maximum contribution for the
near-term, consider doing so before current year, the CRA will consider
December 31. This will allow you to your early contribution to be an
recontribute the amount withdrawn excess contribution that is subject
as early as January 1, 2019 rather to the over-contribution tax of 1%
than having to wait until 2020 to of the excess amount per month.
recontribute. On January 1, 2019, your new
If you have contribution contribution room, based on your
room, contributing to RRSP contributions previous year’s earned income, will
your RRSP early (i.e., You have until March 1, 2019 to absorb your over-contribution.
before December make a contribution to your RRSP
31, 2018) helps to or a spousal RRSP in order to be For example, if your RRSP
maximize the tax- able to deduct the amount on contribution limit for 2019 will be
$26,500 in December of 2018, you
deferred growth in your 2018 tax return. However,
if you have contribution room, may want to contribute that amount
your plan which may
contributing to your RRSP early (i.e., to your RRSP in advance. You will
increase your savings have a one-time tax of approximately
before December 31, 2018) helps to
for retirement. $245 (1% of $26,500 - $2,000), taking
maximize the tax-deferred growth in
your plan which may increase your into account your allowable lifetime
savings for retirement. over-contribution limit of $2,000.
However, your tax deduction for your
RRSP contributions if you are RRSP contribution on your 2019 tax
turning 71 return combined with the benefit
of tax-deferral and compounding
An RRSP must mature by December
growth in the RRIF should outweigh
31st of the year in which you turn 71.
the penalty.
On maturity, you must withdraw the
funds, transfer them to a RRIF, or use If you have a younger spouse,
them to purchase an annuity. You consider making your RRSP
will not be able to make any further contributions to a spousal RRSP
contributions to your own RRSP after until the year your spouse turns
this date. age 71, thereby avoiding the over-
contribution penalty.
If you are turning age 71 in 2018,
have earned income for the year, and
RESP contributions
plan to convert your RRSP to a RRIF,
consider making your 2018 RRSP A Registered Education Savings Plan
contribution before your RRSP is (RESP) is a way to save for a child’s
converted. You will have to make this or grandchild’s post-secondary
contribution by December 31, 2018 education and can also be used as an
because the new contribution room income splitting vehicle. The lifetime
based on your 2018 earned income contribution limit is $50,000 per
will not be created until January 1, beneficiary and there is no annual
2019, at which point, your RRSP will contribution limit.
have already been converted to a
By making RESP contributions,
RRIF.
you may be eligible to receive the
This early contribution (sometimes Canada Education Savings Grant
called the forgotten RRSP (CESG). The government will match
contribution) will allow you to claim 20% of the first $2,500 in annual
an RRSP deduction on your income contributions to a maximum grant of
tax return for 2019 or any year $500 ($2,500 x 20%) per beneficiary,
thereafter. per year. Each beneficiary can receiveRBC Wealth Management | 5
a lifetime maximum CESG of $7,200. selling, you should first consider
Consider contributing to the RESP the size of the potential distribution
by December 31st if you haven’t and the resulting tax liability. It is
maximized your contributions to take important for you to determine
advantage of tax-deferred growth in how much you will save by avoiding
the RESP. the receipt of this distribution in
comparison to the costs that a sale
The income earned on the CESG could trigger (i.e., redemption fees).
and the contributions within the
RESP can be taxed in your child’s or Tax shelters
If you set up a spousal grandchild’s hands, who likely has You may consider purchasing a tax
loan or funded a family a lower marginal tax rate than you, shelter such as limited partnership
trust with a prescribed when paid out to them. units or flow-through shares before
rate loan, remember to year-end in order to receive tax
pay the interest owing Capital gains realized in a trust deductions. A tax shelter is generally
by January 30, 2019. If a trust is properly structured, structured so that the expenses
capital gains realized by the trust may incurred by the tax shelter in the first
be allocated to a minor beneficiary few years are flowed directly to you
and taxed in their hands with little so that you may deduct them against
or no taxes payable. Individuals, any of your taxable income.
including minor children, with no
other taxable income can realize As with any investment, the
approximately $22,000 of capital investment potential of the tax shelter
gains tax-free each year due to their and not just the initial tax savings
basic personal exemption. The should be considered when deciding
amount varies by your province or whether to invest in a tax shelter.
territory of residence.
Moving within Canada
Timing of mutual fund purchases The marginal tax rates may vary
When you purchase a mutual significantly by province or territory.
fund part way through the year, For example, combined with the
you purchase the fund at its net federal rate, the top marginal tax
asset value, which includes any rate in Nunavut is 44.5% and the
accumulated income and gains top combined rate in Nova Scotia is
that have not yet been distributed. 54.0%. Since you are generally subject
When the fund makes a distribution, to tax based on your province or
the distribution includes these territory of residence on December
accumulated earnings and the 31st, if you are moving to a province
distribution is fully taxable, or territory with a lower tax rate,
even though you purchased the consider moving prior to year-end.
accumulated earnings with your If you are moving to a province
after-tax dollars. or territory with a higher tax rate,
consider delaying your move until
There are ways to avoid the early 2019.
distribution. For new purchases,
you could simply purchase the fund Interest on family loans
after the distribution date. This way, If you set up a spousal loan or funded
you purchase the fund without any a family trust with a prescribed rate
accumulated income and gains. loan, remember to pay the interest
owing by January 30, 2019. The
If you have already purchased the
borrower may be able to claim a
fund, consider selling the fund prior
deduction for the interest paid on
to the distribution date. Before6 | RBC Wealth Management
their tax return. The lender will have among others. Approval of the tax
an income inclusion on their tax waiver by the CRA usually takes about
return. The timing of the income six weeks; therefore, for the 2019 tax
deduction and inclusion depends on year, you should start applying in late
the year the interest relates to, when October or early November of 2018.
the interest is paid, and the method
(cash versus accrual) you regularly Tax planning for business owners
follow in computing your income. If you own a business, you may want
to consider the following strategies.
Year-end expenses
Generally, you can deduct certain Consider an Individual Pension Plan
expenses you paid in the year on If your business is incorporated, as
your personal income tax return. a shareholder and an employee of
If you normally file a tax Therefore, remember to pay all your business, you have the option
waiver (CRA Form T1213 investment management fees, tuition of considering an Individual Pension
Request to Reduce Tax fees, deductible accounting and legal Plan (IPP) as a method of saving for
fees, childcare expenses, alimony, retirement. An IPP is a defined benefit
Deductions at Source) to
medical expenses and any business registered pension plan, similar to
have your employer reduce
expenses (if deductible on your many large company sponsored
taxes withheld at source personal tax return) by December plans, except it is established and
from your pay, don’t forget to 31st if it is your intention to deduct sponsored by your company and
re-file this form as it must be them on your 2018 tax return. designed for you as the only member.
submitted and approved by IPPs generally have only one plan
the CRA annually. Re-filing your tax waiver member except certain family
If you normally file a tax waiver (CRA members may also participate if they
Form T1213 Request to Reduce Tax are employees of the company.
Deductions at Source) to have your
employer reduce taxes withheld at In order to establish a plan you must
source from your pay, don’t forget receive employment income from
to re-file this form as it must be your company which is reported on
submitted and approved by the CRA a T4 slip. An IPP is most suitable for
annually. If you have not filed this those who have significant T4 income
form in the past, consider doing so and are at least forty years of age.
if you normally receive a tax refund
If your company is incorporated and
when you file your tax return. This
you are looking for both year-end
will allow you to have more cash flow
corporate income tax deductions and
during the year to accomplish various
a structured retirement savings plan
financial goals such as making
for yourself, consider establishing an
monthly RRSP contributions, making
IPP.
additional mortgage payments,
or reducing or eliminating other Pay salaries before year-end
personal loans or credit card debt.
If you operate your own business,
The CRA will normally approve the consider paying reasonable salaries
tax waiver for individuals who expect to yourself and family members who
the following types of deductions: work in the business, before year-end.
RRSP contributions, alimony This year-end payment constitutes
payments, carrying charges, childcare earned income which increases RRSP
expenses, and employment expenses, contribution room for the followingRBC Wealth Management | 7
year. The payment will also give Conclusion
your business a tax deduction in the This article covers some common
current year. The salary paid must individual tax planning strategies
be reasonable based on the services that you may want to consider before
performed by your family member. year-end. Speak with your qualified
A good rule of thumb is to pay your tax advisor to determine if any of
family member what you would pay these strategies are suitable for you in
someone who isn’t related to you. your circumstances.
Declare bonuses before year-end This article may contain several
If your business is incorporated strategies, not all of which will
and you require income from your apply to your particular financial
corporation, consider declaring circumstances. The information in
If your business is a bonus before the end of your this article is not intended to provide
incorporated and the corporation’s tax year and pay the legal, tax, or insurance advice. To
corporation loaned amount no later than 180 days after ensure that your own circumstances
the corporation’s year-end. Assuming have been properly considered and
you money, ensure
your corporation’s year-end is that action is taken based on the latest
that the loan is repaid
December 31st, if your corporation information available, you should
before the end of the declares a bonus on December 31st, obtain professional advice from a
corporation’s tax year 2018, it will get a tax deduction for qualified tax, legal, and/or insurance
after the year the loan 2018 and the tax you will have to pay advisor before acting on any of the
was granted to avoid on the bonus will be deferred if you information in this article.
having to include receive it at the beginning of 2019.
the value of the loan
as income on your Shareholder loans
personal tax return. If your business is incorporated and
the corporation loaned you money,
ensure that the loan is repaid before
the end of the corporation’s tax year
after the year the loan was granted to
avoid having to include the value of
the loan as income on your personal
tax return.
Purchase assets for your business
If you intend on purchasing assets
for your business (i.e., a computer,
furniture, equipment, etc.), consider
making this purchase before year-
end. If the asset is available for use,
this year-end purchase will allow your
business to claim depreciation on
the asset for tax purposes. However,
generally only half of the regular
allowable depreciation can be
claimed for tax purposes in the first
year of an asset purchase.8 | RBC Wealth Management Please contact us for more information about the topics discussed in this article. This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc. (RBC DS)*, RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC), RBC Global Asset Management Inc. (RBC GAM), Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliates, RBC Direct Investing Inc. (RBC DI) *, RBC Wealth Management Financial Services Inc. (RBC WMFS) and Royal Mutual Funds Inc. (RMFI). *Member-Canadian Investor Protection Fund. Each of the Companies, their affiliates and the Royal Bank of Canada are separate corporate entities which are affiliated. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and mutual fund representatives of RMFI, Investment Counsellors who are employees of RBC PH&N IC, Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC DS. In Quebec, financial planning services are provided by RMFI or RBC WMFS and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC DS. Estate & Trust Services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies or RMFI, clients may request a referral to another RBC partner. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC Wealth Management Financial Services Inc. RBC Wealth Management Financial Services Inc. is licensed as a financial services firm in the province of Quebec. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, RBC WMFS, RBC DI, Royal Bank of Canada or any of its affiliates or any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. ® Registered trademarks of Royal Bank of Canada. Used under licence. © 2018 Royal Bank of Canada. All rights reserved. NAV0001 (08/18)
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