Year-End Tax Planning Tips: Family Investments

The purpose of year-end planning is to reveal the best ways to build, grow, and preserve income and assets. Done well, it puts a focus on avoiding wealth eroders like taxes and inflation. The object is to shore up financial resources well into the 2020s and beyond despite the uncertainties of tax, economic, and political change.

Working with the Attribution Rules . Our taxes are calculated on a progressive scale in Canada, on an individual-by-individual basis. We all qualify for a Basic Personal Amount (a tax-free zone), but after this, the more you earn, the more you pay.

It would be ideal to randomly transfer financial resources from high earners to low earners to get the best possible after-tax results. After all, economic decisions are usually for the household as one economic unit. Unfortunately, such an attempt to avoid paying high marginal rates of tax won’t work. It attracts what’s known as the Attribution Rules. Simply put, income generated in the hands of a low-taxed transferee from assets transferred by the high earner will be attributed back to that high earner for reporting on his or her return. There are, however, a few exceptions to these rules which should be integrated into year-end planning discussions:

• Transfers to spouse. In this case, all investment earnings are attributed back to the higher earner. However, it is possible to set up a bona fide investment loan upon which the prescribed interest rate is charged (currently 2%). This current rate of interest can be for the lifetime of the loan. Two tips: create these inter-spousal loans before year-end and make sure interest is paid to the transferor by January 30 every year.
• Minor children can report capital gains earned on transferred funds; however, dividends and interest are attributed back to adult transferors until the child turns 18. Transferring funds for the purpose of acquiring capital assets could be a tax-smart move provided there is a good probability of capital appreciation and no probability of income from dividends or interest. In this case, open a non-registered account in the child’s name, which is an informal in-trust arrangement. Important proviso: the parents can’t touch the money for their own needs. If they do, the plan will be thrown offside and the transferor will have to report the income.

Another opportunity is simply to invest the Canada Child Benefits (CCB) received for a child’s own source earnings into a separate account. Now all investment earnings – interest, dividends, foreign investment income and capital gains - are properly taxed in the hands of the child.

• RRSP Strategies. Each family member must have “earned income” and RRSP contribution room from prior years to contribute to an RRSP. This includes children, who should file tax returns to report any active income from employment or self-employment. Examples are babysitting or snow shoveling. The notional RRSP room created by filing a return can come in handy down the line. For example, it could help to create a transfer of tuition fee credits to a supporting parent. Funding the RRSP will create tax-deferred income for a longer compounding period yet the RRSP deduction is never wasted. It can be deferred to the future to be claimed when the child is taxable. Encourage families with industrious minors to catch up on missed tax returns before year end. It’s possible to adjust filings back to the 2009 year before December 31 for a total of 10 years.

Bottom line: Some families will pay more taxes on investments after the election; others may get a targeted tax break. Regardless of whether capital gains inclusion rates rise or interest rates fall, your clients will appreciate your astute guidance in uncovering the most tax savings possible before we bid adieu to the first decade of the 21st century. Call it your contribution to maximizing their ROI.

Next Time: Tax Tips for Homeowners and Employees

Evelyn Jacks is President of Knowledge Bureau and author of 54 books on personal tax and wealth planning. Her most recent is almost sold out. Be sure to order Essential Tax Facts 2019 now.

Come out and meet Evelyn Jacks, and her special guests, bestselling author of Master Your Retirement, Doug Nelson, and prolific educator Larry Frostiak of Frostiak and Leslie, on tour at the CE Summits in November. The topic is advanced year-end tax, retirement and owner-manager planning strategies. see details below for registration.

Register by October 15 for early bird tuition rates at the CE Summits , taking place this November in Winnipeg, Toronto, Calgary and Vancouver.

COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC., 2019.

UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.