So you're the ultimate procrastinator. Here we are, practically at year end, and you're only now thinking of ways to save tax for 2010. Well, better late than never. And believe it or not, there are still some things you can do to save tax before the clock strikes midnight on Dec. 31. As we think about family this time of year, let's think about involving family in our tax planning.
Trigger a capital loss
If you have investment assets that have dropped in value, consider transferring them to a child or a trust for your child before year end. You'll be deemed to have sold the investment at fair market value, which will trigger the capital loss. You'll be able to use this capital loss in 2010 to offset capital gains this year, or in the three prior years. As an aside: Don't bother transferring your losers to your spouse; your loss will be denied because your spouse (unlike a child) is "affiliated" with you under our tax law.
Pay salary or bonuses to family
You still have time to accrue or pay salary or bonuses to family members who might have worked in your business in 2010. The remuneration must be reasonable for the services provided, but will be deductible if this "reasonable test" is met and you paid out the remuneration for the purpose of earning income.
Contribute to a spousal RRSP
If you contribute to a spousal RRSP, you'll be entitled to the RRSP deduction, but your spouse will face tax on the withdrawal later. Now, I always recommend making spousal RRSP contributions before Dec. 31. Why? If your spouse makes a withdrawal from the RRSP in the year of an RRSP spousal contribution, or in the two prior years, all or part of that withdrawal might be taxed in your hands. So, a contribution made in this calendar year could be withdrawn by your spouse as early as Jan. 1, 2013, without concerns that you, and not your spouse, might face the tax. If you wait until January to contribute, your spouse will have to wait until Jan. 1, 2014 before making a withdrawal that escapes attribution back to you.
Make a withdrawal from your RRIF
If you're 65 or older you might be entitled to claim the pension tax credit if you have eligible pension income. If you have no such income, making a withdrawal from your RRIF before the end of the year should entitle you to that tax credit. This makes most sense if you're in the lowest marginal tax bracket where the tax credit will offset most or all of the tax on that withdrawal.
Set up a loan at the prescribed rate
Interest rates continue to be low, which is good news for taxpayers. The Canada Revenue Agency announced on Dec. 8 that the prescribed rate for the first quarter of 2011 will be just 1 per cent - again. Why is this valuable? Normally, if you lend money to your spouse, a minor child, or trust for a minor child, the income earned by your family member on that cash will be attributed back to you and taxed in your hands. Not so if you charge the prescribed rate of interest on that loan. If you set up a loan to one of these family members at just 1 per cent, before Mar. 31, 2011, those loan proceeds can be invested and your family member will pay the tax on any income earned - not you. And get this: The 1-per-cent rate will apply indefinitely as long as the loan remains outstanding. The interest must be paid by your family member to you by Jan. 30 of each year for the prior year's interest charge. So, don't forget to ensure that interest is paid this coming Jan. 30 for any loans set up any time prior to 2011.
Borrow to donate to charity, then pay dividends to family
Want some tax relief this year? Consider making a donation to charity before Dec. 31. If you're self-employed, consider borrowing the funds to do this, then pay dividends early in the new year from your company to family members, who are shareholders, who may pay tax at a lower rate. Your family can then use those funds to pay off your loan. You'll get a donation tax credit, a one-year deferral of tax on the dividend paid in 2011 (taxes not due until April, 2012), and lower taxes on that dividend paid to your family member.
Tim Cestnick