Year-End Tax Decisions | FBC, Canada's Farm & Small Business Tax Specialist

Year-End Tax Decisions

Pay less tax and have a happier new year.

December 31 is the deadline for several important tax-management decisions. Don't lose these opportunities to keep your money in your own pocket.

Every year at this time millions of Canadian taxpayers seem to enter a period of denial. They put taxation issues on the back burner in the mistaken belief that tax time is several months down the road. This is understandable. Taxation is an unpleasant topic and most of us prefer to think about something else.

On the other hand we all work hard for our money. And while prepared to pay for reasonable public services and social safety nets, we are not always comfortable with government explanations of how some of our tax money is spent. Most of us would rather spend it ourselves.

To keep tax liability to the legal minimum requires planning. And with careful planning, it's amazing how much you can shave off your tax bill. Better yet, you may recover taxes paid in previous years. But don't wait until April. Get moving right now.

The standard strategies in year-end tax planning are simple. First, defer income and taxable capital gains until the next tax year. Second, bring anticipated tax-deductible expenses and capital losses into this tax year.

The logic of this is particularly sound if you are taxed at the highest personal rates.

Strategies for Farmers Using Cash Accounting

Farmers using cash accounting or the "cash method" for reporting income for tax purposes can take advantage of several strategies to reduce their net farm income prior to year-end.

Deferred cash grain tickets let you sell crop inventories in one year while deferring taxes on the sale until the following year if the ticket provides for payment after year-end.

Even when a deferred cash grain ticket is used to pay for expenses in the current year and the expenses are deducted in the same year, CRA has allowed the income to be deferred.

Also note that cash advances for crops received under the Agricultural Marketing Programs Act are treated as loans. These payments put cash in your pocket but do not have to be included in income until the crops are sold.

Prepaying a supplier for farm inputs (feed, fertilizer, chemicals, seed, etc.) is common practice, but such prepayment is not considered a deductible expense unless:

  • Goods are actually purchased pursuant to a verbal or written agreement
  • The quantity and nature of the goods meet the normal requirements of the farm
  • The supplier is capable of delivery of the goods
  • They are delivered and used in the farm operation

Cash expenses can also be increased by purchases of inventory to the extent that you don't create a loss. Used to defer income over several succeeding years, however, this method has a downside. Assuming a profit would have been realized before the purchase of inventory, deferring income in successive years using this practice can create a sizable tax liability when the time comes to sell the farm or exit the business.

Year-End Tax Strategies for All Small Businesses

If you have depreciable assets (machinery or equipment) to sell, it may be better to wait until the new fiscal year. The delay lets you claim another year of capital cost allowance (CCA).

Alternatively, if you're in the market for depreciable assets, buy them before your fiscal year-end to increase your CCA claim by half of the annual rate in the year the item is acquired.

If you are eligible for performance bonuses from an off-farm job (which many farmers now hold), you may be able to arrange with your employer to receive the bonus early in the new year rather than at year-end.

As well, since January 2001, all employees (non-shareholders) have been eligible for 2 non-cash gifts a year totaling no more than $500. Such non-cash gifts (gift certificates are considered cash) are deductible for the employer but not taxable in the hands of the employee. If the gifts exceed $500 (including all applicable taxes such as GST, HST and PST), the entire amount is considered a taxable benefit - not just the amount that exceeds $500.

Capital Losses Offset Capital Gains

Although it may be hard to believe, there is a silver lining to recent steep declines in the value of stock and mutual fund portfolios. For example, anyone who bought Air Canada at $10 and still holds it at $1 outside their RRSP may be able to recover some of their capital gains taxes paid in previous years if they sell the stock before year-end. Net capital losses can be carried back as far as 3 years.

By claiming net losses now to reduce capital gains reported in previous years you can recover taxes paid in those years. If you have capital gains in the current year then you must use the losses in the current year.

If you wish to keep "loss" stocks for the long run, you can always repurchase them 30 days after completing the sale. Or, if you think the stock value may increase before the 30-day limit on repurchase has run its course, you can purchase it immediately for your RRSP without running afoul of the 30-day repurchase rule.

If you want them recorded by year-end, such transactions must be completed before December 21 to accommodate the 3 days required for settlement by your broker and the holidays that fall at this time of year.

Benefit from Other Tax Strategies

Other general tax issues to keep in mind include the 15% federal tax credit (approximately 25% when provincial tax credits are factored in) on your first $200 of charitable donations.

Donations greater than $200 qualify for a 29% federal tax credit, which grows to approximately 45% once parallel provincial tax credits are applied. Obviously there's a small benefit to one spouse claiming both partners' charitable donations. That way, all but $200 (rather than $400) qualifies for a credit at the higher rate.

Also consider spousal RRSP contributions. If you expect your spouse will earn less than you in retirement, contribute to his or her RRSP. The funds must remain in your spouse's RRSP account for a minimum of 3 years, but when withdrawn they should be taxed at a lower rate. You can claim the deduction immediately for the contribution. If you withdraw the funds before the 3 years are up, the amount will taxable as your income, not that of your spouse.

Of course, you have until the end of February of the following year to make RRSP contributions to your own or a spousal plan for the current tax year, but don't wait until the last minute.

Finally, medical or dental expenses not paid for by an insurance policy, legal fees related to your business or an appeal of a tax ruling, and safety deposit box fees should all be recorded before year-end.

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