Employees often think that their taxes are straightforward – report the T4 slip on the personal tax return and file it with the Canada Revenue Agency (CRA). Admittedly, the tax return preparation is relatively simple. However, tax planning opportunities that can be done before year-end are often overlooked. You may be able to take advantage of some these strategies to reduce or defer your taxes.
Timing of Income
Where possible, you should consider deferring the receipt of certain employment income to the following year where your marginal personal tax rate will be lower. Alternatively, consider accelerating the receipt of certain employment income to the current year if you anticipate your personal tax rate will be higher next year.
If you have excess tax deductions or non-refundable tax credits (e.g. RRSP contributions, child care expenses, support payments) in the current year, consider requesting a reduction of payroll income tax withholdings early next year.
You should ensure that any interest relating to low-interest employee loans for the current year is paid on or before January 30 of the following year to avoid a taxable employment benefit. The taxable benefit attributable to a low-interest employee loan is equal to the interest for the period of the loan at the prescribed rate less the interest paid during the year.
Are you driving an employer-provided vehicle? Consider ways to reduce your operating cost benefit and/or standby charge benefit. To reduce the operating cost benefit, you can reimburse your employer for some or all of the personal-use portion of the operating costs before December 31 if business use of the vehicle is less than 50%. To reduce the standby charge benefit, you can reduce the number of days the car is available or decrease personal use of the vehicle.
Employee Stock Options
You should consider exercising Canadian-controlled private corporation (CCPC) stock options and claiming the lifetime capital gains exemption, where available. You must own the shares (not the options) for at least 24 months to claim the lifetime capital gains exemption.
Teachers and early childhood educators should consider purchasing eligible school supplies before the end of the year, in order to claim the new eligible educator school supply tax credit.
You should consider claiming a GST/HST rebate to recover GST/HST included in employment expenses that have been deducted for tax purposes (e.g., home office expenses, automobile expenses, supplies, etc.).
Did you move closer to work during the current year? You may be able to deduct eligible moving expenses for tax purposes. To qualify, your new home must be at least 40 kilometres (by the shortest usual public route) closer to your new work location.
Ensure that the following expenses are paid by December 31 to claim a tax deduction or credit for the current year: adoption expenses, child care expenses, investment counsel fees, medical expenses, political contributions, spousal support payments, tuition fees and interest on student loans. Consider accelerating any payments to the current year.
Make charitable donations by December 31 to get a tax receipt and claim a donation tax credit for the current year. If you own publicly-traded shares with accrued capital gains, consider donating the shares to a registered charity or foundation since capital gains realized on gifts of publicly-traded shares are not subject to tax.
Make RPP contributions by December 31 in order to claim a deduction for the current year.
Make RRSP contributions as early as possible to maximize tax-deferred growth. The deadline for making tax-deductible RRSP contributions is March 1 of the following year. Check your RRSP contribution limit before making a contribution.
If applicable, consider making RESP contributions for a child or grandchild before December 31. There is no annual RESP contribution limit; however, there is a lifetime contribution limit of $50,000/child. Plan for the RESP to receive the maximum lifetime Canada education savings grant (CESG) of $7,200, which depends on the amount of annual RESP contributions and the beneficiary’s age.