Income Tax Planning

Most of us avoid thinking about our income tax return until it is time to file it. We are taxed on the calendar year so December is the last month that you can undertake transactions that will affect your tax return. The following are some suggestions that may reduce your 2018 income tax expense.

Most tax deductions and tax credits are available only for expenditures made in the calendar year. You may benefit by paying some expenses sooner than you normally would.

Childcare expenses may only be deducted in the year they are paid. If the childcare for December 2018 is paid in January 2019 you include it on your 2019 income tax return. Paying your January 2019 childcare in December 2018 will move the deduction from your 2019 tax return to your 2018 tax return accelerating the deduction.

Medical expenses are eligible for a tax credit for any twelve-month period that ends in the tax year. You may be able to increase the income tax benefit by accelerating or delaying some elective medical expenses such as prescription glasses or paying the outstanding balance on a dental procedure done on a payment plan.

Charitable donations must be made by December 31, 2018, to receive the tax credit for 2018. If you intend to donate to a charity and you have shares in a publicly traded company with an unrealized gain, consider donating the shares instead of cash. You receive the charitable donation tax receipt for the fair market value of the shares, giving you the full tax credit and the realized gain on the disposition is exempted from income tax.

Review your investment portfolio paying attention to your realized gains and losses. If you have a realized gain, consider selling a security that has an unrealized loss to offset the realized gain. While income tax planning is important, don’t let income taxes determine what you sell. Evaluate your positions to determine if changes should be made to your holdings.

Contributions to Federal and Provincial Political Parties receive generous tax credits. If you support your favourite political party before December 31, 2018, it will save some money on your tax bill come April 2019.

For those taxpayers that have sufficient income with no source deductions make sure your income tax instalments are paid for 2018. Any interest you incur for insufficient instalment payments is not income tax deductible.

If you have self-employment income and plan to add to your equipment or vehicles, the capital cost allowance claims are accessed faster if you acquire those assets prior to December 31, 2018, rather than waiting until after that date. Ensure that you acquire the equipment that you need for your business and don’t buy equipment for the tax deduction. Buying equipment not needed for the business just to obtain an income tax write off does not make sense from the cash flow point of view.

RRSPs acquired in the first sixty days of 2019 can be deducted against the 2018 income. Making the contribution in December 2018 instead of waiting for February 2019 will allow the tax-sheltered income to work to your benefit sooner. Make sure you have purchased sufficient RRSPs to cover the repayments required for home purchases or education costs.

While on the topic of RRSPs, if your income is low in 2018 you may benefit by withdrawing RRSP prior to December 31, 2018. If you have income under the basic income tax exemption there will be no income tax cost to you if you draw out RRSP money up to the basic exemption.

If you have room in your TFSA and you have money in non-registered investments you should top up your TFSA to save the income tax cost on those investments.

For more information please consult with your professional tax advisor.