Some employees have it rough. At Shinmei Electric Co. in Shanghai, employees used to be fined the equivalent of about $8 if they reported for work late – the first time – and were fired if they were late a second time. Further, employees were limited to washroom breaks of two minutes or less (don't forget to bring your stopwatch). As it turns out, about a thousand of the employees were not very happy about these arrangements and decided to hold 18 managers hostage from Friday morning, Jan. 18, 2013, until almost midnight the following day. The company relaxed the rules after the incident.
Forget about your employer for a minute. Employees in Canada are more concerned about the Canada Revenue Agency in most cases. After all, employees are not provided with many tax breaks. Having said this, there are a few tips for employees to consider before year-end to save tax this year and next.
1. Time your bonus properly
If you're due for a bonus soon, consider whether you'd be better off receiving the bonus in 2015, or deferring it to next year, then speak to your employer about it. The right answer depends on the level of your income, including the bonus. It's expected that the Liberals will make good on their promise to reduce tax rates by 1.5 percentage points on income between $44,700 and $89,401, and increase rates by four points for income above $200,000 – likely effective for 2016 (we're expecting the announcement possibly Dec. 3 when Parliament is back in session). So, if you expect your total income with the bonus to exceed $200,000, you might be better off receiving that bonus in 2015. For lower-income earners, deferring the bonus to January (or later) could result in some tax savings for you. As an aside, a bonus can be deferred for up to three years.
2. Negotiate a home office
Before the year-end, sit down with your employer and negotiate a requirement to work from home more than half the time so that you'll be able to deduct certain home-office costs next year. Your employer will have to sign Form T2200 as evidence of this requirement.
3. Purchase assets for a CCA
Employees are entitled to claim a capital cost allowance (CCA) – that is, depreciation for tax purposes – on certain assets that are used for employment purposes. A vehicle is the most common example, but aircraft and musical instruments are also eligible.
If you're in the market to buy a new car or other asset eligible for CCA, consider making the purchase before year-end. This will provide a healthy CCA claim for 2015, which will save you taxes this year. If you wait until January to make the purchase, that same CCA claim won't be available until next year.
4. Pay interest on loans
If you've received a low-interest loan from your employer, make sure that you pay any interest by Jan. 30, 2016, for this year's interest charge. This will reduce any taxable interest benefit you'd otherwise face for 2015.
5. Reduce taxable car benefits
If your employer provides you with a company car, you could face two taxable benefits: (1) a standby charge (for having a company vehicle available to you for personal use), and (2) an operating cost benefit.
Consider reducing the taxable standby charge by reducing the number of days between now and year-end that the car is available to you.
Also, consider purchasing the car from your employer at its depreciated value in order to avoid this taxable benefit next year. As for the operating cost benefit, you can reduce the tax hit by reimbursing your employer for some or all of the operating costs by Feb. 14, 2016, and by minimizing your personal-use driving between now and year-end.
6. Minimize tax on stock options
If you have stock options that are "in the money," you'll face a taxable employment benefit when you exercise them. That benefit is equal to the fair market value of the shares when you exercise the options less the exercise price that you pay.
Today, you may be entitled to a deduction for 50 per cent of that benefit if your options qualify. The Liberals announced their intention to limit this deduction to just $100,000 of stock option benefits each year. This change could be effective the date they formally announce it, which could be any time, but likely Dec. 3 when Parliament is back in session. So, consider exercising any vested options you have before the announcement if your benefits exceed $100,000. This will maximize the likelihood that you'll be able to claim the 50-per-cent deduction on the full benefit.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.