As we approach the end of the calendar year, this is a good time to take a look at some options available to help manage your income tax liability and prepare for the upcoming tax filing season.
Invest in equipment
Consider accelerating purchases of depreciable assets. Provided the assets are available for use at year-end, certain assets can be eligible for a full immediate tax deduction in the year, up to a limit of $1.5 million in the taxation year for an associated group
Salaries or dividends?
Your Opengate advisor can help determine the ideal blend of salary or dividend remuneration for yourself and family members. We will look at a range of factors, including cash needs, federal and provincial tax rates, and corporate attributes (to determine which type of dividends can be paid) while managing the Tax on Split Income rules. If opting for salaries, be aware that any accrued amounts — including bonuses — are paid within 179 days of year-end.
Do you have an outstanding loan from your corporation? Consider repaying it within a year after the end of the corporation’s tax year in which the debt occurred. Otherwise it may become income to you personally.
Avoid interest changes by ensuring you remit final corporate income tax balances to the Canada Revenue Agency (CRA) and applicable provincial tax authorities within two months following year-end (three months for certain Canadian-Controlled Private Corporations).
Ensure expenses are appropriately documented through receipts. For motor vehicle expenses, a logbook should be maintained to support the expenses and taxable benefit calculations.
Track and retain receipts for annual union, professional, or other dues that were not paid for / reimbursed by your employer. Similar to the 2021 tax year, if you worked from home for more than 50 percent of the time for at least four consecutive weeks in the year, you may be able to claim home office expenses, either based on a flat rate or on actual expenses.
Make contributions to your Registered Retirement Savings Plan (RRSP) to reduce taxable income for the year. Contributions made to a spouse or common-law partner’s RRSP are also deductible. The 2022 contribution limit is 18 percent of your 2021 earned income up to a maximum of $29,210. Check your 2021 Notice of Assessment for your available contribution room for 2022. To be deductible for 2022, contributions must be made on or before March 1, 2023.
Contributions to a Registered Education Savings Plan (RESP) will not impact your 2022 income tax liability. However, it will allow you to save for your child’s future education and utilize the Canada Education Savings Grant (up to $500 each year, up to a lifetime maximum of $7,200 per child).
Income earned in a Tax-Free Savings Account (TFSA) will not be subject to income tax in the future. The 2022 limit is $6,000. Check with CRA and your financial institutions to confirm your TFSA contribution room.
The federal and provincial governments offer donation tax credits, resulting in tax savings of up to 50 percent of the value of the gift. The right donation strategy can help minimize income taxes while meeting your philanthropic goals.
Recent and upcoming changes to consider
Underused Housing Tax
A one percent annual tax will apply to certain underused or vacant residential property owned by non-resident, non-Canadians beginning in the 2022 calendar year. The new tax will impact owners of such property on record on December 31, 2022.
Effective September 1, 2022, the federal luxury tax applies on the sale of certain vehicles and aircraft costing more than $100,000 and boats costing more than $250,000.
Are you saving for your first home?
If you are saving for your first home but don’t expect to make a purchase for several years, you may want to consider opening a new tax-free First Home Savings Account (FHSA) once this new type of account is available. To open an FHSA, you must be resident in Canada and at least 18 years old. You must also not have lived in a home that you owned at any time in the year the account is opened, or during the preceding four calendar years.
If you decide to open an FHSA, you can deduct your contributions (subject to an annual limit, and a maximum cumulative limit of $40,000) and the income earned in the account is not taxable. In addition, you won’t have to pay tax on withdrawals from your FHSA used to purchase your first home. However, keep in mind that if you make an FHSA withdrawal to purchase a home, you cannot also make a Home Buyers’ Plan withdrawal for that same property.
The legislation for the new FHSA has not yet been enacted, but is proposed to come into force on April 1, 2023.
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