Now that the annual rush of the tax-filing season has come and gone, it’s important to remember that this time of the year can come with consequences of which many are unaware. The “post” tax-filing season can also open opportunities for financial professionals to uncover new assets to invest, preserve future wealth accumulation and discuss financial planning issues.
Here are eight essential tax strategies to consider for this time of the year:
1. Save money by filing on time.
Wealth-building efforts can erode quickly when late tax-filing penalties are applied to taxes owed on April 30. (This date is also the deadline for filing Form T1135, which is used to report foreign assets.) But there are two more important deadlines to consider: business proprietors must file by June 17 this year (usually it’s June 15, but that falls on a Saturday in 2019); and the Tax-Free Savings Account Return Form (TFSA) must be filed by the end of June to report TFSA overcontributions, contributions by non-residents, or when investments are non-qualified, prohibited or provide an “advantage.”
2. Pay tax debt first.
Filing late returns also attracts expensive interest charges on taxes and penalties, compounding daily and calculated at the prescribed rate (currently two per cent) plus an extra four per cent. That began on May 1 for anyone with a balance due, including business proprietors. Worse, when requests to file and pay are ignored, the Canada Revenue Agency (CRA) has extra powers: it can garnishee wages and/or seize assets. The strategy here is simple: pay tax debt first. If you cannot pay, work with the CRA’s collections department to pay over time. Wherever possible, avoid taking money out of a registered retirement savings plan (RRSP). That generates a further taxation problem next year.
3. Plan for the CPP.
In a surprising new trend, it is estimated up to 45 per cent of the work force will be self-employed by 2020. Strategies for new proprietors include planning for increases in Canada Pension Plan (CPP) premiums, which are payable on the T1 General Income Tax and Benefit Return. Here’s the math for 2019: when net business income is more than a basic exemption of $3,500, premiums will attract a rate of 10.2 per cent – twice what employees pay. Maximum pensionable earnings are $57,400; so, the premium payable is $5,497.80. Worse, rates will rise to 10.5 per cent for 2020 and continue to increase each year until 2023, when they reach 11.9 per cent. Thereafter, higher earners will pay eight per cent more on a portion of their earnings. This can present a cash flow issue for future tax filers. Proactive RRSP planning can help to reduce taxes payable to offset the increasing CPP burden before the April 2020 tax-filing deadline.
4. Reduce tax instalments.
With self-employment and passive income sources on the rise – especially among the baby boomer demographic – it’s important to minimize quarterly instalment remittances. The CRA will automatically calculate these remittances based on previous years’ income levels. But if income is expected to decrease in 2019, it’s possible to pay less. Professional financial advisors need to be on top of that to ensure existing investments are not disturbed by withdrawals to fund unnecessary instalments.
5. Leverage tax refunds.
Reinvesting tax refunds is a smart way to leverage last year’s productivity. Some strategies to consider: pay down non-deductible debt; invest in an RRSP; maximize TFSA contributions; and revisit potential tax-exempt savings in insurance policies for some family members to minimize future taxes on accrued wealth.
6. Recover mistakes on previous years’ tax filings.
A great post-season strategy is to scour tax returns filed in previous years for missed deductions or credits over a 10-year adjustment request period (2009 to 2019). Corrections to capital loss reporting will offset amounts due for accrued gains on future dispositions of taxable capital assets, for example, while a missed disability tax credit could result in five-figure refunds during this period. These are all important ways to preserve wealth and prepare for the unanticipated, like a tax audit.
7. Manage tax audit season.
The CRA can always ask for receipts when expenses such as moving, auto or home office costs, tuition fees, medical or charitable donations are claimed. The burden of proof is always on the taxpayer. That burden is higher for business owners who must verify income, explain why certain costs are reasonable (for example hiring your spouse or children) and account for asset acquisitions and dispositions. The best strategy is to work with a tax specialist who’s experienced in taxpayer appeal rights.
8. Reduce withholding taxes.
Advisors who review tax returns for their clients may also find other ways to create new money for investments. Those employees with significant RRSP contributions, employment and childcare deductions or large medical or charitable expenditures, for example, could apply to reduce tax withholdings at source. That’s possible by filing Form T1213.
When looking at key strategies to consider during the post tax-filing deadline, it’s always important to point out that taxpayers began to work for themselves last year on June 10, according to the Fraser Institute’s Tax Freedom Day. That’s more than 160 “tax work days.” Given that we are almost halfway into 2019, big value comes from helping taxpayers take back some of their productivity by planning tax-efficient income and savings.