YEAR-END TAX PLANNING (top of the page)

Some 2006 year-end tax planning tips include:

1. If the following expenditures are made by individuals by December 31, 2006 they will be eligible for 2006 tax deductions: moving expenses, child care expenses, safety deposit box fees, charitable donations, political contributions, medical expenses, and alimony.

2. 2006 eligible Registered Retirement Savings Plan (RRSP) contribution amounts are noted on the 2005 personal income tax return assessment notices. You have until March 1, 2007 to make tax deductible RRSP contributions for the 2006 year.
Consider contributing to a spousal RRSP to achieve income splitting in the future.

3. Persons turning age 69 in 2006 must mature their RRSP into cash, an annuity or a Registered Retirement Income Fund by December 31, 2006.

4. If you own a business, consider paying a reasonable salary to family members for services rendered to the business.

5. An individual whose 2006 net income exceeds $62,144 will lose all, or part, of their old age security.
Senior citizens will begin to lose their income tax age credit if net income exceeds $30,270.

6. Consider purchasing assets eligible for capital cost allowance before the year-end. For example, employees may claim capital cost allowance on automobiles used in their employment.

7. If you had taxable capital gains in the year, or any of the preceding three years, consider selling capital properties with an underlying capital loss prior to the year-end. This capital loss may be offset against the capital gains. Certain restrictions may apply.

8. Registered Education Savings Plan (RESP)
A Canada Education Savings Grant (CESG) for RESP contributions will be permitted equal to 20% of annual contributions for children (maximum $400 per child per year).

9. Health and dental premiums for the self-employed Individuals will be allowed to deduct amounts payable in respect of the year for Private Health Service Plan coverage in computing business income provided they meet certain criteria.

10. Tax on Split Income
The Income Tax Act applies the maximum marginal tax rate to certain passive income of individuals under the age of 18. Therefore, consider minimizing this type of income in 2006.

11. A refund of Employment Insurance paid for non-arm’s length employees may be available upon application to CRA.

12. Taxpayers that receive “eligible” dividends from private and public corporations will have a significantly lower tax rate on the dividends.

13. Eligible public transit passes acquired after July 1, 2006 will be entitled to a tax credit.

PERSONAL TAX RETURNS (top of the page)

PERSONAL TAX CREDIT

The 2006 Federal Budget increased the Federal Tax Credit to pension income of $2,000 commencing January 1, 2006.

Pensions that qualify include:

1. An annuity from a pension plan,
2. For persons aged 65 or older, annuity payments from an RRSP, a RRIF, or a deferred profit-sharing plan.
3. For persons aged 65 or older, the taxable portion of annuities purchased from an insurance company.

However, a person under age 65 would also get the pension credit if they were receiving annuity payments inherited from a deceased spouse.

AFTER-SCHOOL RECREATIONAL PROGRAM - CHILD CARE EXPENSE

In a September 8, 2006 Tax Court of Canada case, the taxpayer paid fees to a gymnastics club of $984 for after-school classes and $431 for summer and spring break gymnastics camps for her 12 year old daughter.
Taxpayer Wins!
The essential question is what is the primary reason for enrolling the child in the activity. In this case, the primary reason was to provide child care so that the taxpayer was able to perform duties of employment. Therefore, the taxpayer’s deduction for child care expenses was allowed.


EMPLOYMENT INCOME (top of the page)

LEGAL EXPENSES

In an August 11, 2006 External Technical Interpretation, CRA notes that the Income Tax Act permits a deduction in computing income from employment for legal expenses paid in the year to collect, or to establish a right to, employment income.
Therefore, if the income received from a disability claim is taxable, legal expenses incurred would be deductible.

REIMBURSEMENT OF HEALTH PREMIUMS BY EMPLOYER

In a July 25, 2006 External Technical Interpretation, CRA notes that medical and hospital insurance plans covered by Blue Cross and various other medical insurers would be considered Private Health Service Plans (PHSPs). Therefore, the reimbursement of premiums for health and dental benefits by an employer for employees would be excluded from employment income.


BUSINESS/PROPERTY INCOME (top of the page)

PRIVATE HEALTH SERVICE PLAN (PHSP)

In a July 14, 2006 Technical Interpretation, CRA notes that when a sole proprietor implements a Cost-Plus Plan, it must provide coverage for at least one employee other than the sole proprietor. Otherwise, it is not in the nature of insurance as the proprietor has not undertaken to indemnify another person.


OTHER TIPS(top of the page)

FLOW-THROUGH SHARES

Taxpayers that donate publicly listed securities after May 1, 2006 do not have to report the capital gain if the securities are donated to a registered charity - but not to a private foundation. As the tax cost of a flow-through share is usually nominal or nil because of the immediate write-off of deductions, the donation for a tax credit based on fair market value is advantageous because the otherwise large capital gain is not taxable.

REGISTERED EDUCATION SAVINGS PLAN (RESP)

A person may contribute up to $42,000 to an RESP in the lifetime of a beneficiary at a maximum of $4,000 per year. Also, a Canada Education Savings Grant (CESG) is available at $400 per year at a rate of 20% per contribution to a maximum of $7,200 (18 years times $400 per year). Therefore, a $2,000 RESP contribution will net the maximum $400 CESG for the year.

RRSP - CREDITOR PROOF

Currently, RRSPs are subject to creditor attacks with the exception of certain life insurance RRSPs. Also, Registered Pension Plans are creditor proof.
New Federal Bill C-55 (Royal Assent - November 25, 2005) puts RRSPs and RRIFs on a similar basis as life insurance RRSPs and Registered Pension Plans. However, RRSP/RRIF contributions in the last twelve months will not be exempt from seizure.

Also, this exemption will only apply where an individual “locks in” the RRSPs. There will also be a cap on the exempt RRSP portion based on the bankrupt person’s age and the maximum RRSP contribution limit in the year of bankruptcy.


MARRIAGE BREAKDOWN (top of the page)

CHILD SUPPORT

In an August 24, 2006 Tax Court of Canada case, Mr. P paid child support under a 1993 Ontario Court Divorce Judgment of $650 per month per child.
On August 31, 1998, the Appellant and former Spouse signed an Agreement varying the child support payable to $500 per month in compliance with the May, 1997 Child Support Guidelines.

The Court noted that this new agreement changed the status of the child support payments from deductible/taxable to non-deductible/non-taxable.

DIVISION OF A PENSION

In an April 6, 2006 External Technical Interpretation, CRA notes that if there is a division of pension benefits on a marriage breakdown, the portion received by each spouse is the income of that spouse even if the administrator issues one cheque to the Plan member. The intention of the parties in the Separation Agreement is the key when determining the income tax treatment.

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