Tax Tip Thursday

Individuals Making Gifts

Charitable giving

Make charitable donations

Both the federal and provincial governments offer donations tax credits that, in combination, can result in tax savings of up to 55% of the value of your gift in 2024, depending on your province or territory of residence.

With total cash donations up to $200 in a year, the federal donation credit is 15% of the donation amount. For total donations exceeding $200 in a year, the federal donation credit jumps to 29% (33% to the extent taxable income exceeds $246,752) of the donation amount.

Provincial donation credits are also available and the total credit may be up to 55% once total annual donations exceed the $200 in a calendar year.

December 31 is the last day to make a donation and get a tax receipt for 2024. Keep in mind that many charities offer online, internet donations where an electronic tax receipt is generated and emailed to you instantly.

Gifts “in-kind”

Gifting publicly-traded securities, including mutual funds and segregated funds, with accrued capital gains “in-kind” to a registered charity or a foundation not only entitles you to a tax receipt for the fair market value of the security being donated, it eliminates capital gains tax too. You should plan gifts in-kind well before year end, to allow for sufficient time to make arrangements.

AMT considerations

If you plan to make significant charitable donations, changes for 2024 AMT calculations could affect you. Only 80% of the donation tax credit would be allowed when calculating AMT (although 100% was allowed previously). Also, if you make in-kind donations of publicly listed securities, or a donation is made on the exercise of a qualified employee stock option of publicly listed securities, 30% of capital gains on those securities would be added when calculating AMT (although none of the capital gain is included currently).

Donor advised funds When you are not immediately sure of the charities you wish to support, you might consider making the gift to a donor advised fund (“DAF”), which is an account at a public foundation that holds your donation. You will get a tax receipt for your donation in the year that you contribute to the DAF. Each year you can recommend distributions to be made from your DAF to other registered charities

Individuals with changes to tax rates

If you anticipate that your income tax rates will be substantially different in 2025, it may be worthwhile to shift income and expenses between 2024 and 2025, where feasible.

Perhaps you may have just started, or returned to, work in 2024 so your income (and taxes) may be lower in 2024 than in the future. If so, you may wish to realize income in 2024 by taking steps such as selling investments with a capital gain, exercising stock options or taking bonuses in 2024 rather than 2025, where feasible.

It may also make sense to defer deductible expenses until 2025 where possible.

On the other hand, you may anticipate that your tax rate could decrease in 2025, perhaps if you plan to retire or if you had a one-time sale of an appreciated investment. If you expect your tax rate to be lower in 2025, you may wish to defer income by taking steps such as waiting to sell investments with a capital gain, exercise stock options, take bonuses or distribute dividends to owner-managers from a corporation, where feasible, in 2025 rather than 2024.

Business owners and employers

Compensation planning for owners of incorporated businesses

A corporation may distribute its income to you (as a shareholder and employee of the corporation) either as salary or dividends. If corporate income is paid to you as salary (or bonus), the corporation (employer) can claim an income tax deduction for the salary (and applicable payroll taxes), which reduces its taxable income. You include the salary in your taxable income and pay tax at personal, graduated tax rates.

As an alternative to distributing income as salary, the corporation can pay tax on its corporate income. In the year the income is earned or a future year, the corporation can distribute its after-tax corporate income to you as dividends.

You generally pay no tax on capital dividends and pay a lower tax rate (than for salary) on eligible and non-eligible dividends due to dividend tax credit (DTC), which is meant to compensate for taxes paid by the corporation.

So how do you choose between salary and dividends? As a general rule-of-thumb, if you need to withdraw funds from your corporation, perhaps to pay personal expenses, then consider withdrawing salary to create RRSP contribution room. Receiving salary of up to $180,500 in 2024 would create RRSP contribution room for next year of up to $32,490 (the 2025 maximum). If you do not need to withdraw funds from your corporation, you may still wish to withdraw sufficient funds to maximize contributions to RRSPs and TFSAs.

Finally, consider leaving any remaining after-tax business income in your corporation to benefit from the significant tax deferral, which may provide more investment income in the long run than personal investing in non-registered plans. You may then distribute the company’s income as dividends in a future year.

Corporate loss planning Tax-free dividends

If your corporation has unrealized losses in its investment portfolio, it’s worth checking to see if there is a positive balance in your corporation’s capital dividend account (CDA) before engaging in any tax-loss selling, as discussed above. The CDA is a notional account that tracks the non-taxable portion of capital gains, among other things. Dividends may be designated as capital dividends, which are generally tax-free to the shareholder, if they do not exceed the balance of the CDA.

Net capital losses will decrease the CDA and will, therefore, reduce (or possibly even eliminate) the capital dividends that may be paid. Prior to realizing any capital losses, consider paying out any capital dividends to eliminate any positive balance in the CDA.

Loss consolidation

You may have more than one corporation within a corporate group. One (or more) of these companies may be profitable (“Profitco”), and one (or more) may be suffering losses (“Lossco”) at this time. The CRA has generally permitted the consolidation of losses within a related group through a variety of methods. For example, Profitco may subscribe for shares of Lossco, which in turn makes a loan to Profitco. Interest payments on the loan will reduce the taxable income of Profitco, and the taxable interest income received by Lossco will be offset by its losses.

Capital dividends, which are not taxable to Canadian residents, can be paid to the extent there is a positive balance in a corporation’s notional Capital Dividend Account (CDA). The CDA balance includes the non-taxable portion of capital gains less allowable capital losses, as well as certain tax-free life insurance death benefit proceeds.

Income splitting

The “tax on split income” (TOSI) rules can apply where an individual receives dividend or interest income from a corporation, or realizes a capital gain, and a related individual is either actively engaged in the business of the corporation or holds a significant amount of equity (with at least 10% of the value) in the corporation.

When the TOSI rules apply, dividends are taxed at the highest marginal rate. If your private corporation has other shareholders, such as your spouse, partner, children or other relatives as shareholders, review the possible impact of the TOSI rules with your tax and legal advisors before paying dividends to these individuals in 2024.

Passive investment income

The first $500,000 of active business income in a Canadian-controlled Private Corporation (CCPC)4 generally qualifies for the small business deduction (SBD), which reduces the corporate tax rate by 12 to 21 percentage points in 2024, depending on the province or territory. This means there may be significantly more after-tax income in your corporation for investment when the SBD is available. To limit the advantage of having additional after-tax income for investment, there are rules that reduce the SBD by $5 for each $1 of passive income over $50,000 in the previous year. Once passive income reaches $150,000 in the previous year, none of the current year’s business income may be eligible for the SBD and lower tax rates. If your corporation is approaching the $50,000 limit for passive income in 2024, consider a “buy and hold” strategy to defer capital gains. Also, consider whether an Individual Pension Plan or corporately-owned exempt life insurance may be appropriate, as income earned within these plans will not be treated as passive income.5 Ontario and New Brunswick have not followed the federal measure, so the provincial SBD is still available for active business income up to $500,000 annually in these two provinces. This may lessen the negative tax impact of the federal measure. You should consult a tax advisor prior to year-end to determine how provincial and federal measures may apply. You may also wish to withdraw sufficient salary from your private corporation by December 31 to maximize contributions to RRSPs and TFSAs. These registered investment plans may offer benefits beyond those available with corporate investments, as outlined in the CIBC report RRSPs and TFSAs: Smart choices for business owners. Receiving salary of at least $180,500 by December 31, 2024 may allow the maximum RRSP contribution of $32,490 in 2025. Reasonable salaries may also be paid to family members who work in the business to allow them to make contributions to RRSPs and TFSAs. This will also reduce future investment income within the corporation, perhaps preserving access to the SBD, as discussed above. Planning for passive investment income is more fully described in our report CCPC tax planning for passive income. 4 5 The SBD is available to a CCPC that earns active business income up to the annual limit of $500,000 federally and provincially or territorially (except in Saskatchewan where it’s $600,000) in 2024. The SBD must be shared among associated corporations. A tax advisor should be consulted before investing in an Individual Pension Plan or corporate owned life insurance. You should also consider whether these strategies fit into your overall financial plan. 2024 year end tax tips I 9 Selling your incorporated business If you are considering the sale of your incorporated business, speak to your tax adviser to find out if the tax you pay may be reduced under two new incentives. Canadian Entrepreneurs’ Incentive (CEI) – (for 2025) The 2024 Federal Budget announced the Canadian Entrepreneurs’ Incentive, which would reduce the tax rate on capital gains on the disposition of qualifying shares. The CEI would reduce the capital gains inclusion rate to one-half of the prevailing inclusion rate, on up to $2 million of capital gains over an individual’s lifetime. The lifetime limit will be phased in by increments of $400,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2029. For capital gains over $250,000 that are realized on or after June 25, 2024 and would have an inclusion rate of 66 2/3% (as described above), the CEI will result in an inclusion rate of 33 1/3% (one-third) for qualifying dispositions. This measure would apply in addition to the newly enhanced $1.25 million lifetime capital gains exemption (LCGE). To qualify, the shares must meet certain conditions, and there are restrictions so that the CEI won’t apply to shares of a professional corporation, nor to a corporation whose principal business is in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sectors, nor the consulting or personal care service industries. The CIBC report on the 2024 federal budget has more information about these requirements. If your corporation may qualify for the CEI, discuss with your tax adviser whether waiting until 2025 or a later year may help reduce the tax you’d pay. Employee ownership trusts (EOTs) An employee ownership trust is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can be used to facilitate the purchase of a business by its employees, without requiring them to directly pay to acquire shares. As of 2024, EOTs are now permitted in Canada. The first $10 million in capital gains realized on the sale of a business to an EOT in 2024, 2025 and 2026 are exempt from tax, subject to certain conditions. This $10 million exemption applies to the business, and not to each shareholder. This means that if multiple individuals dispose of shares to an EOT as part of a qualifying business transfer and meet the qualifying conditions, they may each claim the exemption, but the total exemption claimed can’t exceed $10 million in aggregate. The individuals will be required to agree on how to allocate the exemption.

Your financial decisions can affect your taxes!

We are here to help you make the best decisions for your financial success.  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.