As the end of the tax year approaches, it a good time to go over tips that you can pass along to clients. Changes to some income tax laws came into effect this year, and it’s always good to revisit some of the tried-and-true strategies.

Three of Canada’s top tax experts gave us their top tax tips for 2006:

> Take Advantage Of The New Charitable Donation Rules. Clients who are inclined to give to charity should know that giving securities as a charitable gift is more tax-advantageous than ever, says Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto. Ottawa recently reduced the taxes on capital gains on securities that are donated to charity.

Normally, when a client sells a stock or a security, 50% of the increase in value of the security is brought into income and taxed, Golombek says. Under the old rules, if the client donated the stock to charity, he or she would receive a donation receipt for the fair market value of the shares, and have to include 25% of the gain in his or her income.

Under the new rules, for donations made on or after May 2, 2006, there are no taxes on the capital gain on a security or mutual fund unit that is donated directly to charity. “For clients who were going to make a cash donation to charity anyway, that’s a huge benefit,” Golombek says.

Advisors should look through the portfolios of such clients for securities that have appreciated significantly. They can then suggest the client donate those securities instead of cash. If the client is reluctant to part with the stocks, thinking they are going to rise further in value, the advisor can suggest donating the stocks, then purchasing more shares.

“That way, they’ve bumped up their cost base of the stock and will pay taxes only on future capital gains,” he says. “That’s when advisors can add significant value for clients who normally make charitable donations.”

> Benefit From The New Dividend Taxation Rules. “The new rules could make a whole lot of blue-chip dividend stocks look more attractive — not dull and dusty,” says Heather Evans, a tax lawyer and partner with national consulting firm Deloitte & Touche LLP in Toronto.

In the 2006 federal budget, Ottawa increased the non-refundable tax credit on “eligible dividends” paid to shareholders of publicly traded Canadian corporations and Canadian-controlled private corporations. The government increased the “gross-up” on dividends to 45% from 25%, and the dividend tax credit to 19% from 13.5%. That means that 145% of the dividend is included in an investors income, and the investor gets a credit of 19% of the grossed-up amount.

The provinces also have gross-up and tax credit regimes, which vary. Since Ottawa’s budget announcement regarding the tax treatment of dividends in May, only Manitoba, Ontario, Quebec and Alberta have released their responses.

Ontario plans to match the new federal gross-up and introduce a tax credit starting at 5.13% in 2006, growing to 7.7% by 2010.

Manitoba has significantly increased its tax credit to 11%, up from 5%. The overall impact will be a cut to Manitoba’s top marginal tax rate on eligible dividends to 23.83% from 35.08%.

Quebec has increased its gross-up to 45%, matching Ottawa, but it is also increasing its tax credit to 11.9% from 10.83%, thereby decreasing the combined federal/provincial tax rate on dividends to 29.65% from 32.2%.

Alberta plans to parallel the federal changes and eliminate double taxation by increasing the provincial tax credit on eligible dividends over the next four years.

Overall federal/provincial harmonization is expected by 2010. In time, says Evans, the new rules could make Canadian corporate dividends even more attractive.

For clients who receive dividends from public companies or from mutual funds that hold a large amount of dividend-paying shares of Canadian companies, dividends are looking more appealing, Golombek says: “If it makes sense from an asset-allocation point of view, you might want to re-explore the possibility of getting some dividend-paying stocks in your client’s portfolio.”

> Make Use Of The Increased Pension Credit. Those over age 65 traditionally have enjoyed a tax credit on pension income. That is, a certain amount of income from a pension — which can include income from a pension plan or a retirement income fund, but not an RRSP — is subject to a tax credit at the lowest tax bracket. For 2006, the credit went up to $2,000 from $1,000, so clients may receive a 15.25% tax credit on the first $2,000 of qualified pension income.

@page_break@“There is a planning opportunity here,” Golombek says. Clients over the age of 65 who don’t normally receive pension income but have RRSPs should convert some of their RRSPs to a RRIF and take some of their income from the RRIF. “They would want to receive at least $2,000 a year from a RRIF, which would allow them to take advantage of this credit,” he says.

> Capitalize On The New Public Transit Credit. Remind clients to hold on to their monthly transit passes and receipts, says Aurèle Courcelles, senior specialist in tax and estate planning at Investors Group Inc. in Winnipeg. The new tax credit for public transit passes is a non-refundable tax credit for the cost of buying a monthly (or longer) pass for commuting on buses, streetcars, subways, commuter trains and local ferries. It came into effect July 1.

Clients can deduct the amounts paid for eligible passes, as long as they are properly documented. The pass must indicate that it is monthly and should be dated on or after July 1, Courcelles says. The pass should also show the name of the transit authority and the amount paid. If the amount is not shown on the pass, clients should save the receipts.

“Clients can claim the amount they paid for themselves, their spouse or common-law partner and any children under 19,” Courcelles says. “These can be combined onto one return.”

> Differentiate Between The Children’s Fitness Tax Credit And Child-Care Expenses. Evans says clients with children in sports programs can look forward to tax relief next year and in subsequent years. Remind them to save their receipts, starting in 2007. (See child tax benefits story on page B16.)

The issue of qualifying sports programs brings up an important point for parents, Evans says. Under the current law, clients should be careful to distinguish between supervision and instructional programs for children.

Expenses for supervision may qualify as child-care expenses. But if the program includes instruction, such as swimming lessons, it may be regarded as a recreational program, which does not qualify as child care.

“The question is: was the payment made for basically babysitting — in which case, it’s an eligible child-care expense. Or was it swimming instruction — in which case, it isn’t,” says Evans.

A number of organizations have been “loose” in handing out receipts they claim are tax-deductible. If the Canada Revenue Agency’s constant audits of child-care expenses are any indication, parents who intend to take advantage of the new fitness credit should double-check, she says.

> Make Spousal RRSP Contributions Before Yearend. Courcelles reminds advisors that clients who wait until the RRSP deadline in February to make a contribution to a spousal RRSP may have to pay more taxes on a subsequent early withdrawal. The Income Tax Act’s attribution rules state that an RRSP withdrawal made on money deposited in the year of the withdrawal or in the previous two years will be attributed to the depositor, not the spouse.

So, if a husband makes a deposit into his (lower-income) wife’s spousal RRSP in December 2006, and she decides to make a withdrawal in 2009, she will be taxed at her lower rate. But if the contribution had been made in February 2007, the withdrawal would be taxed at the husband’s rate. She would have to wait until 2010 to make a withdrawal taxed at her own rate. Deposits made before Dec. 31 rather than in January or February can reduce the withdrawal waiting period by one year.

> Trigger Capital Losses Before Yearend. Remind clients who have realized capital gains through the sale of securities that those gains can be offset by capital losses. If there are securities in the client’s portfolio that have gone down in value, realize the losses by selling the securities, which will offset the gains.

If the client is particularly fond of the stock and wants to buy it back, he or she can do so. Just don’t be in too much of a hurry, Courcelles warns: “Be careful of the ‘superficial loss’ rules, which say the loss will be deemed to be zero and non-deductible if you purchase the same or similar securities 30 days before or 30 days after you sold it.” IE