2014 Year-End Tax Planner: Looking Back To 2014 And Forward To 2015

FEDERAL HIGHLIGHTS

Income-splitting - A new non-refundable tax credit of up to $2,000 was introduced to allow a higher income spouse to transfer up to $50,000 of earnings to the lower income spouse, effective for the 2014 tax year.

Child care expenses - Effective for the 2015 tax year, the maximum amounts that can be claimed for the Child Care Expense Deduction will increase as follows:

For children under the age of 7: from $7,000 to $8,000; For children aged 7 through 16: from $4,000 to $5,000; and For children who are eligible for the Disability Tax Credit: from $10,000 to $11,000. Children's fitness tax credit - Fees eligible for the children's fitness tax credit will increase to $1,000, starting with the 2014 tax year. Effective for the 2015 tax year, the tax credits will become refundable.

Trusts and estates - Starting in 2016, the graduated tax rate applicable to a testamentary trust created by an individual's death will be replaced with the highest personal income tax rate - 29 per cent federal rate plus any provincial tax rates - if the testamentary trust has been in existence for more than 36 months, subject to certain exceptions. The graduated tax rate will continue to apply for trusts having beneficiaries who qualify for the federal disability tax credit. Further, testamentary trusts and grandfathered inter vivos trusts will be required to have taxation years ending on December 31.

Be aware of proposed changes which deem taxable capital gains that arise in spousal trusts, joint spousal trusts, alter ego trusts or self-benefit trusts to be payable to the deceased individual in the year of his or her death.

PROVINCIAL HIGHLIGHTS

Small business rate and thresholds - The threshold in Manitoba will increase from $400,000 to $425,000 on January 1, 2014, while the threshold in Nova Scotia will decrease from $400,000 to $350,000 on January 1, 2014. The federal small business deduction clawback is extended to Ontario for the taxation year ending after May 1, 2014. Quebec has introduced a new manufacturing and processing (M&P) rate of 6 per cent, effective June 5, 2014. The rate will be reduced to 4 per cent on April 1, 2015.

Personal income tax - Starting in 2014, the top Ontario personal tax rate before surtax of 13.16 per cent is applicable to income over $220,000, down from $514,000, while the personal tax rate increases from 11.16 per cent to 12.16 per cent before surtax on income between $150,000 and $220,000. British Columbia personal tax rate increases from 14.7 per cent to 16.8 per cent for 2014 and 2015 on income over $150,000.

INTERNATIONAL HIGHLIGHTS

Back-to-back loan - Where a taxpayer has a debt owing to a third-party intermediary and a non-resident person uses his or her property to secure the debt - to circumvent the application of the thin capitalization rule and the Part XIII withholding tax - the taxpayer will be deemed to owe an amount to the non-resident person. The new anti-avoidance rules will be effective for taxation years commencing after 2014.

Immigration trusts - The 60-month exemption period for an immigration trust is eliminated, effective February 10, 2014. A temporary relief is available for immigration trusts to continue to benefit from the 60-month exemption, if no contribution was made between February 10 and December 31, 2014. Effective January 1, 2015, an immigration trust will be subject to tax on its worldwide income.

Foreign Income Verification Statement (Form 1135) - The "transitional reporting method" adopted in 2013 has been extended into 2014, with some slight changes. In 2013, taxpayers were exempt from reporting any securities on the T1135, if income from such securities was reported on T3/T5 slips. This exception is no longer available for 2014 and future taxation years.

ENTREPRENEURS

Dividends or salaries - An owner-manager must determine the most tax effective salary-dividend mix that minimizes overall taxes for the corporation and the relevant individuals. The owner-manager must consider personal marginal tax rates, the impact of alternative minimum tax (AMT), the corporation's tax rate, RRSP contribution room ($138,500 of earned income in 2014 is required to maximize RRSP contribution in 2015), provincial health and/or payroll taxes, Canada Pension Plan (CPP) contributions and other personal deductions and credits available:

If personal cash requirements are low, consider retaining income in the corporation to obtain the tax deferral as corporate rates are lower than personal rates; Be aware that distributing dividends that trigger a refund of refundable tax on hand does not necessarily provide tax benefit to the shareholder, if the shareholder lives in certain provinces where the dividend refund rate of 331/3 per cent is less than or equal to the top personal tax rate on the dividends; Ontario residents: For 2014, the top provincial personal tax rate of 13.16 per cent will apply to taxable income exceeding $220,000 and 12.16 per cent on income between $150,000 and $220,000. Tax savings can be achieved by deferring the receipt of bonus or dividend receipts until the high income tax is eliminated. It is estimated that the personal tax rate increase will be eliminated once the Ontario budget is balanced. Based on current estimates, the budget is expected to be balanced in 2017 or 2018. British Columbia residents: British Columbia's personal tax rate is 16.8 per cent on taxable incomes over $150,000 for 2014 and 2015. The tax rate is expected to decrease to 14.7 per cent after 2015. Qualified small business corporation share (QSBC share) status - A sale of QSBC shares will be eligible for the lifetime capital gains exemption of up to $800,000 in 2014. Among other criteria, to maintain the QSBC share status, a corporation needs to have substantially all of the assets of the business used in an active business carried on primarily in Canada. Excess cash and passive investment assets may jeopardize the QSBC share status. A cumulative net investment loss (CNIL) balance may limit the individual taxpayer's ability to claim the capital gains exemption on a sale of QSBC shares. Receiving dividend and interest income instead of a salary will reduce CNIL balance, and in turn preserve the capital gains exemption claim.

Scientific research and experimental development (SR&ED)

Claims for SR&ED expenditures and relevant incentives (i.e., input tax credits) are due 18 months after the corporation's year-end. These claims cannot be late filed; and Where a Canadian controlled private corporations (CCPC's) taxable income, on an associated group basis, exceeds certain thresholds, the corporation may not be able to access the higher SR&ED investment tax credit (ITC) rate and the ITC will not be refundable. The ITC limitations will also be applicable in situations where a CCPC's taxable capital for federal purposes, on an associated group basis, exceeds certain limits. Consider paying a bonus in order to reduce the current year's taxable income to access the higher ITC rate. Remuneration accruals - A...