Okay, I'm turning over a new leaf. I have promised my wife that I won't wait until Dec. 24 to start my Christmas shopping. Procrastination is now a thing of the past. And just to prove it, I'm starting a discussion of year-end tax planning ideas early. Here we are in September, and last week I wrote about harvesting capital losses before year-end. This week, I want to share a few more ideas because there is still time to make a push in 2010 to reduce your taxes for this year. So let's hop to it.
1. Set up a Tax-Free Savings Account. If you haven't already set up your Tax-Free Savings Account (TFSA), take the time to do this soon. You can contribute up to $5,000 annually into a TFSA if you're resident in Canada and you're 18 or older. TFSAs were introduced in 2009, so setting one up for the first time in 2010 will enable you to contribute $10,000 ($5,000 for each of 2009 and 2010). Although you can't claim a deduction for your contribution, the money inside the TFSA can grow on a tax-sheltered basis, and can be withdrawn later without tax. Contributing sooner rather than later can start the tax-free compounding this year, rather than in a future year.
2. Withdrawal from your TFSA before year-end. If you already have a TFSA and you're planning on making a withdrawal, consider doing this before year-end. You'll be able to recontribute the money to your TFSA later since the amount of your withdrawal is added to your contribution room - but only starting in the next calendar year. So, a withdrawal before the end of 2010 increases your contribution room in 2011. If you wait until early 2011 to make your withdrawal, you won't able to recontribute that amount to your TFSA until 2012. If you do recontribute those funds earlier than you should, you'll face a 1-per-cent penalty on the overcontribution, and the government has introduced new rules that will levy a 100-per-cent tax on income attributed to deliberate overcontributions. The same rules apply to income from prohibited investments in a TFSA.
3. Make a low-interest loan to your spouse. You can lend money to your spouse for investment purposes. Generally, any income your spouse earns will be attributed back to you to be taxed in your hands, unless you charge the prescribed rate of interest on that loan. That rate of interest today is just 1 per cent - but that rate won't last forever. The rate can be reset every quarter and the current low rate is only guaranteed to be in place until the end of the year. If you set up the loan before year-end, you can lock in that rate on the loan indefinitely - so consider setting up a loan before the end of the year to shift investment income to your spouse if he or she is in a lower tax bracket.
4. Time your dividends to reduce taxes. The tax rate on dividends (both eligible and ineligible) is expected to increase in most provinces starting in 2011. If you can control the timing of your dividends (perhaps because you are paying yourself those dividends from your own company) you may be better off paying those dividends in 2010 than waiting until 2011. The tax you'll save will depend on your province of residence, but could be about 1.5 per cent. While this percentage may not be huge, the money is better in your pocket than the taxman's.
5. Reduce your tax on a company car. If you drive a company car, you're going to face two taxable benefits: the "stand-by charge" and the "operating cost benefit." The stand-by charge is a steep taxable amount, but it can be reduced if your business use of the car is more than 50 per cent of the kilometres driven in the year, and your personal use of the car is less than 1,667 kilometres a month, or 20,000 kilometres a year. Further, if your business use is greater than 50 per cent, you can also reduce your operating cost benefit (which is 24 cents a personal kilometre driven) by choosing an alternative method of calculation, which sets your operating cost benefit at 50 per cent of the stand-by charge, and notifying your employer in writing before year-end of your choice. You might want to change the extent to which you use a company car before year-end if you can minimize personal kilometres to reduce your taxable benefits.