Year End Tax Tips
Prescribed Rate Loan Planning
High income individuals can split income with their spouse/common-law partner or children (either directly or through a trust) using prescribed rate loans. The current prescribed rate of interest is 1% until March 31, 2022 but may increase beyond that. Individuals can lock in the 1% prescribed rate of interest if the loan is implemented by March 31, 2022. This planning is beneficial with children that have no income and children in university with tuition tax credits available. Note the earlier the loan is implemented, the sooner income can be earned and split with lower income family members. Therefore, individuals should consider setting up these plans by end of year.
Calendar year interest must be paid by January 30th of the following year to avoid income attributing back to the lender for all years.
Planning for Tax Increases
With possible tax rate increases in 2022, an individual may want to shift and increase their 2021 income. Individuals with owner-managed corporations can achieve this with increased salary or dividends in 2021. Individuals can also consider foregoing discretionary deductions and triggering capital gains on assets with accrued gains.
Loss Realization for Year End
Ensure the sale of investments with accrued losses is completed no later than December 29, 2021, in order for the settlement to occur in the 2021 tax year. This allows the loss to be offset against other capital gains realized during the tax year. If undertaking this planning, ensure you or your spouse do not repurchase the loss stock within 30 days before or after the sale date or the loss will be temporarily denied until the loss stock is subsequently sold.
Consider RRSP contributions by end of year to benefit from tax-deferred growth sooner than later. Many individuals will wait until the contribution deadline to make contributions but to maximize the benefit of the plan, make contributions as soon as possible. The maximum for 2021 is $27,830.
TFSA Contributions and Withdrawals
The TFSA dollar limit for 2022 will remain at $6,000. Unused contribution room will carry forward indefinitely so contributions can be made at any time. However, the timing of withdrawals warrants careful consideration because the amounts withdrawn will not be added back to your contribution room until the beginning of the following year. Therefore, if withdrawals are anticipated in 2022, you may want to push the withdrawal to 2021 in order to get the reinstated contribution room on January 1, 2022 as opposed to January 1, 2023.
Upcoming Important Dates
- December 14, 2021 – Finance will present its Economic Outlook – FP Summary to follow
- December 15, 2021 – Fourth quarter personal tax instalments due for 2021 tax year
- December 29, 2021 – Last day to settle trades for calendar 2021
- December 31, 2021
- Deadline to make charitable donations for the 2021 tax year
- Deadline to request fairness relief for 2011 tax year
- January 1, 2022 – additional $6,000 of TFSA contribution room available
- January 30, 2022 – Deadline to pay interest on prescribed rate loans to family members
- March 1, 2022 – Deadline to contribute to RRSP for 2021 tax year (max $27,830)
- March 15, 2022 – First quarter personal tax instalments due for 2022 tax year
- March 31, 2022
- Possible deadline to lock in 1% prescribed rate on loans to family members
- Deadline for individuals to file 2021 T1-OVP Returns for excess RRSP contributions
Lifetime Capital Gains Exemption
The LCGE exemption limit will increase to $913,630 in 2022 (2021 – $892,218) for qualified small business corporation shares. The limit will remain at $1,000,000 for qualified farm or fishing property.
Canada Pension Plan (CPP) limit increases in 2022
The 2022 maximum pensionable earnings will increase to $64,900 for 2022. In addition, the employee and employer contribution rates have increased to 5.70% which is up from 5.45% in 2021. The maximum annual employee contribution is $3,499.80.
The self-employed contribution rate will increase to 11.4% from 10.9%. The maximum annual self-employed contribution is $6,999.60.
Employment Insurance (EI) limit increases in 2022
The 2022 maximum insurable earnings will increase to $60,300 for 2022 (2021 – $56,300). The employee contribution rate will remain steady at 1.58%. The maximum annual employee contribution will increase to $952.74 (2021 – $889.54) and the maximum annual employer contribution will increase to $1,333.84 (2021 – $1,245.36).
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.