April always represents a beginning and an end. It’s the beginning of spring, the baseball season, and golf. It’s the end of the cold weather, my chapped lips, and hockey season. This hockey season finished with a celebration for our youngest son, whose team won the championship. This past weekend, the families gathered for a party and the kids received awards.
During my conversation with a few of the parents, the issue of taxes came up (funny how that happens when I’m at parties in April!). It became clear that many had missed opportunities to save tax for 2013 – and several were feeling the pain of that. It was a conversation of coulda, shoulda, woulda. It went something like this:
1. Ian: “I should have contributed to my RRSP, but I got busy and was short on cash anyway, so I didn’t.” Since Ian is a high-income earner, he would have saved about $460 for every $1,000 he might have put into his registered retirement savings plan (RRSP). For 2014, he’ll be able to contribute as much as $24,270, which will save him $11,264 for 2014. An income of $134,833 or more in 2013 will give him the ability to put that maximum into his plan. He’s going to borrow to contribute in 2014, if need be.
2. Donna: “I could have started a home-based business, and might do that this year.” I told Donna she’s on the right track. She’ll be able to deduct a portion of many costs she’s paying for anyway, including mortgage interest, property taxes, repairs and maintenance to her home (including landscaping), and car costs. Donna will also be able to pay her kids to help in the business. She is considering a multi-level marketing business. You know the ones, like Amway, Avon, Mary Kay, The Pampered Chef, and so on. These can be legitimate business opportunities for those looking for ideas.
3. Greg: “I would have split income with my family, but wasn’t sure how.” Income-splitting is the idea of moving income from Greg’s hands to the hands of lower-income family members who will face tax at a lower rate. Greg is going to consider lending money to his wife at the currently low prescribed rate of just 1 per cent, to allow her to invest those dollars and pay the tax on any income earned. He is also looking to gift some money to his kids for them to put in growth investments so that they will pay the tax on the future capital gains, not him. He will likely do this through in-trust accounts with his investment adviser.
4. Mary:“I should have invested more tax-efficiently, but didn’t think it would make a big difference.” Mary ended up reporting a fair bit of interest income on her tax return this year, and paid much more tax than she expected. This year, Mary is going to ensure that more of her interest-bearing investments are held in her RRSP or tax-free savings account to minimize the taxable interest to be reported for 2014. To the extent she’s holding investments outside her RRSP and TFSA, she’s going to focus more on equities since capital gains and dividends are taxed more favourably than interest. I told her to make sure her overall portfolio risk remains appropriate, given the changes she’s going to make.
5. James: “I could have collected free money, but didn’t get around to it.” In 2014, James is going to contribute to a registered education savings plan for his kids in order to receive the Canada Education Savings Grants (typically 20 per cent of RESP contributions, to a maximum of $2,500 per year or $7,200 for each child in their lifetimes) from the government. He’s also going to ensure his 19-year-old daughter files a tax return for 2013 even though she had no income since she’ll be eligible for the GST/HST rebate – cash in her pocket that she wasn’t expecting.
6. Matt: “I would have planned my compensation better, but did what I’ve always done.” Matt owns a small business and operates through a corporation. Every year, he pays himself a bonus to create a deduction for his company to save tax. I told Matt that it can now make more sense to pay himself dividends rather than a bonus, and that the decision between salary or bonus and dividends needs to be revisited every year since tax rates change every year.
Tim Cestnick is president of WaterStreet Family Offices and the author of several tax and personal finance books.