2017 Year-End Tax Tips for Canadians
Author: Sound Choices
December 18, 2017
The content in the below article is meant for Canadian investors only.
While many think of April as tax month, now is an important time to consider any tax opportunities that have to be taken care of before year-end.
Make contributions – so you can receive the government grants
If your child turned 15 this year and has never been a beneficiary of a Registered Education Savings Plan (RESP), you need to contribute at least $2,000 before the end of the year in order to receive the Canada Education Savings Grant (CESG) for 2017 and be eligible to receive the CESG for 2018 and 2019.
Withdraw money for post-secondary students
There are two types of withdrawal options – the Educational Assistance Payment (EAP), which consists of the CESG and earnings, and the Post-secondary Capital Withdrawal, which is the investment principal (the money you invested). The EAP is taxed in the hands of the beneficiary, so if you make a withdrawal before year-end, it will be included in the student’s income for 2017. You can do a final EAP up to six months after the student has left school.
Though not tied to year-end, while you’re thinking about your RESPs, it’s not a bad idea to review the beneficiaries, contribution amounts, etc. to ensure they still make sense.
Make your 2017 contribution
The Tax Free Savings Account (TFSA) allows you to save money each year without paying any tax on the investment income (interest, capital gains or dividend income) you earn. There are so many things you can save for by using a TFSA. It might be to renovate your home, buy a cottage, go on a vacation or save for your child’s wedding or your retirement. The contribution limit for 2017 is $5,500 and the Canada Revenue Agency (CRA) recently announced that it will remain at $5,500 for 2018. The contribution deadline for 2017 is December 31.
If you don’t contribute, your eligible amount is added to your contribution room and can be carried forward indefinitely. To confirm your contribution room, which is tracked by the CRA, go to the ‘My Account’ function on the CRA website.
If you’re planning to withdraw money from your TFSA soon, consider doing it before year-end. The amount withdrawn is added back to your contribution room in the following calendar year so if you withdraw before December 31, this amount would be available to contribute again in 2018.
Contribution deadline – March 1, 2018
While the 2017 contribution deadline is still a couple of months away (March 1, 2018), if you haven’t contributed already, it’s not always easy to find the money to do so after the holiday season. The 2017 contribution limit is the lessor of $26,010 or 18% of 2016 earned income from your previous tax year, minus any pension adjustments, plus unused contribution room from previous years. To find your contribution limit, see your previous year’s Notice of Assessment from the Canada Revenue Agency (CRA) or access your information online using the ‘My Account’ feature on the CRA website.
Did you know you can use your RRSP to help pay for your first home or go back to school?
Through the Home Buyers’ Plan (HBP), you can withdraw up to $25,000 from your RRSP (or $50,000 per couple) to help buy or build your first home. You have 15 years to pay back the amount you withdrew, and must start paying it back in the second year after you buy your home. Otherwise, you’ll be taxed on the money you withdrew.
With the Lifelong Learning Plan (LLP), you can borrow up to $10,000 a year from your RRSP – to a maximum of $20,000 over four years – to help cover full-time education costs. The school you’re attending also has to qualify under the program. You can use this program to fund your education or your spouse’s, but not your children’s. You need to repay amounts withdrawn from an LLP over a period of 10 years. You’ll need to start paying back the money you borrowed from your RRSP by the fifth year after making your first withdrawal or in the second year after you stop going to school full-time, whichever comes first.
So if you’re planning to withdraw money for the Home Buyers Plan or Life Learning Plan and can delay until early 2018, this means the first repayment would be delayed by a year.
If you’re 71, convert your RRSP to a RRIF
A Registered Retirement Income Fund (RRIF) is an RRSP in reverse – RRSPs allow you to accumulate tax-sheltered savings for retirement, while your RRIF generates a taxable retirement income stream from these savings – which still continue to grow and remain tax-sheltered. An RRSP can be rolled into a RRIF at any time, but you are not required to do so until the end of the year in which you turn 71 years of age; at which time, the RRSP matures and must be converted to either a life annuity or a RRIF, or deregistered.
It’s important to note that this doesn’t happen automatically – you’ll need to open a RRIF first and then arrange for the RRSP money to be transferred over. If you don’t provide instructions for your RRSP before December 31 of the year in which you turn 71, the RRSP will be closed and the entire amount converted to cash – that means the entire amount would be added to your income for this year.
A final RRSP contribution can be made until December 31 in the year that you turn 71 years of age.
Withdraw the minimum amount
Each year (beginning the year after the RRIF was opened), a taxable “annual minimum amount” must be withdrawn from your RRIF. The minimum withdrawal is based on a set formula that takes into consideration your age and the market value of the assets in your RRIF account on January 1 of the withdrawal year.
If your RRIF isn’t your main source of retirement income, you may forget to withdraw the minimum amount – this must be done by December 31 of the year following the one in which the RRIF was established and then each year thereafter. For example, if the RRIF is opened in November 2017, the first withdrawal must occur by December 31, 2018.
5. Charitable donations
Planning to donate?
December 31 is the last day to donate and get a tax receipt for 2017 – if you do this online, a tax receipt is usually generated and emailed to you immediately. You can also do a ‘gift in kind’ – this can include mutual fund investments, which are considered to be transferred for their fair market value. If there are any capital gains accrued to that investment, they’re eliminated because of the transfer to a registered charity.
Last chance to claim the First-Time Donor’s Super Credit
The First-Time Donor’s Super Credit (FDSC) was introduced in the 2013 as a temporary non-refundable tax credit for ‘first-time donors’ – to be eligible, neither you nor your spouse have claimed the donation’s tax credit since 2008. The FDSC provides an extra 25% credit for the first $1,000 and can only be claimed once from the 2013 to 2017 taxation years.
Contact your financial advisor to find out how you may reduce your 2017 taxes – before it’s too late.