With less than two months left before the calendar turns over, Canadians run the risk of paying more taxes than necessary if they wait until April to review their tax savings strategies, says Jamie Golombek, managing director, Tax & Estate Planning, CIBC Wealth Advisory Services.
“It’s important to act now before the holiday season begins if you hope to have enough time to take full advantage of tax-savings strategies for 2015 and beyond,” says Golombek.
Below, he outlines various tax-planning strategies.
Consider the timing of income and expenses
The Liberals have stated their first priority will be to cut the federal tax rate from 22% to 20.5% for the middle income-tax bracket, which affects Canadians with taxable annual income between about $45,000 and $90,000. The party also promised to increase the federal tax rate from 29% to 33% for individuals earning more than $200,000 annually.
The timing of these tax rate changes is still uncertain, but many believe they will be effective in 2016.
Middle-income earners who expect the federal tax rate to decrease in 2016 may want to defer income to 2016, where possible. For example, it may be possible to delay receiving bonuses or selling assets that have unrealized capital gains. It may also be useful to claim expenses, such as for RRSP contributions, in 2015, says Golombek.
High-income earners who expect the federal tax rate to increase in 2016 may consider the opposite course of action — receive income in 2015 and defer expenses to 2016, where possible.
Exercise employee stock options
When an employee stock option is exercised, the stock option benefit (the difference between the exercise price and the fair market value of the share at the date of exercise) is included in income. Generally, a deduction equal to 50% of the benefit may be claimed, which allows the stock option benefit to be taxed like a capital gain for tax purposes.
The Liberals have proposed to cap the stock option deduction that can be claimed to $100,000 of stock option gains annually. “As it is unclear when this change may come into effect, employees holding significant stock options may want to consider exercising a portion of stock options in the near future,” says Golombek. This could be particularly important for high-income earners who expect the federal tax rate to increase in 2016.
Harvesting tax losses?
Tax-loss selling involves selling investments with accrued losses prior to December 31 to offset capital gains realized either elsewhere in your portfolio or from the sale of another asset, such as a vacation home or property. In order for losses to be available for 2015, trades must be made no later than December 24, 2015.
“Tax-loss selling is a popular topic this year after the rocky year most major stock markets have had,” says Golombek. “If you purchased securities in a foreign currency, don’t forget that capital gains are calculated in Canadian dollars — so currency fluctuations can be a key factor in determining whether you’re in a loss position.”
The decline in the value of the Canadian dollar may increase capital gains or decrease capital losses, or in some cases, turning what looks like a gain into a loss. “These tips outline some of the ways you can maximize your 2015 tax savings. And, there may be further planning opportunities given the tax changes that are expected,” adds Golombek.