The end of the year
is quickly approaching. Here are a few yearend tax strategies for your individual and owner-manager clients.

> Tax-loss selling. Your clients should make sure they trigger any capital losses they want to use to offset any capital gains for 2005 tax purposes, says Jamie Golombek, vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto.

Three days are needed after the trade — T+3 — for it to be settled, and the Toronto Stock Exchange is closed Dec. 26 and 27. That doesn’t leave enough time after Christmas to process a trade on a T+3 basis. Therefore, says Michel Dorion, information co-ordinator with the TSX Group’s media relations department, you have to make sure the trade is completed by Dec. 23.

> Harvest a spouse’s unrealized capital losses. Sometimes a client can offset capital gains with his or her spouse’s capital losses, says John Mott, tax accountant and author of Thomson Carswell’s Tax Guide for Investment Advisors in Toronto. He has a five-step strategy for spouses, enabling them to use each other’s capital losses to offset gains.

Here’s an example: Alina has $10,000 in unrealized gains on a Canadian bank stock, but has no unrealized losses. Her husband, Ivan, has $10,000 in unrealized losses from a Canadian technology company. He bought the shares at $102 a share; now they’re worth $2 each. He has no unrealized gains.

Alina buys Ivan’s shares for a total of $200 — their current market value. The purchase is arranged through their stockbroker as a “deemed disposition” and, therefore, is documented in case the Canada Revenue Agency asks for details about the transaction.

Ivan elects on his tax return for 2005 not to have the normal spousal rollover apply to the transaction. Since Alina and Ivan are “related persons” under the Income Tax Act, the “superficial loss” rules apply to the transaction. (These rules prevent the sale and repurchase of an identical property within 30 days just to trigger a capital loss.) Ivan is denied a capital loss. Alina’s cost of the shares is increased by the amount of the denied loss so the cost-base of the shares is increased in her hands to the $102 per share.

Alina will have to wait the required 30 days to sell the shares to avoid being subject to the superficial loss rules. Then, assuming the tech shares don’t increase in value, she will realize the capital loss of $10,000 when she disposes of them — by Dec. 23. Alina can then dispose of the bank stock (again, by Dec. 23), realize the $10,000 capital gain and offset it with the $10,000 capital loss.

> Make an annual allocation from the family trust. Inter vivos trusts — trusts established while the person setting them up is still alive — have a Dec. 31 yearend. Under the Income Tax Act, any income left in the trust at the end of the year is taxed at the top marginal rate, says Siân Matthews, an associate with Calgary law firm Bennett Jones LLP.

The trustees need to meet and pass a resolution making that income “paid or payable” to the beneficiaries, says Heather Evans, partner and tax lawyer at Deloitte & Touche LLP in Toronto. That means the income can be paid or made payable with a promissory note.

This way, the income is taxable in the hands of the beneficiaries — at their potentially
lower rate, says Evans.

> Pay any investment-related expenses by yearend. If your clients pay these expenses before the end of the year, they will be able to claim deductions on the 2005 tax return.
Golombek says the types of expenses that can be claimed include:

• interest incurred on money borrowed to buy non-registered
investments;

• investment counselling fees for non-registered accounts;

• deposit box rental charges;

• professional accounting services for bookkeeping of investments, business income and/or rental properties.

> Special rules apply for clients who turn 69 this year. Clients who turn age 69 in 2005 need to ensure their final RRSP contribution is made before Dec. 31, says Golombek: “They don’t have the normal extra 60 days this year.”

Those clients must also convert their RRSPs to annuities, RRIFs or cash by Dec. 31.
Therefore, says Golombek, you might want to suggest that the client make a one-time overcontribution to his or her RRSP in December.

@page_break@Here’s an example: client Rudy is still working and will earn $100,000 in 2005. The earnings will create the maximum eligible RRSP contribution room for the 2006 taxation year, or $18,000. However, since Rudy cannot have an RRSP after he turns 70, he will not be able to make an $18,000 RRSP contribution in 2006.

Golombek says Rudy should consider making a one-time $18,000 overcontribution to his RRSP in December 2005, and pay a penalty tax of $160, which is 1% on $16,000 — $18,000 minus the allowable overcontribution limit of $2,000.

> Owner-manager clients can declare bonuses. Most owner-managed businesses have a Dec. 31 yearend. Clients such as these can lower the tax impact of a profitable year by “bonusing out” income to the owner-manager, Evans says. The preferential tax rate for small businesses is 13.12%, plus the applicable provincial corporate taxes, on the first $300,000 of income, says Evans. After that, the rate increases. If your client’s business makes $500,000 for the year, then a bonus of $200,000 should be declared, bringing the firm back to the $300,000 threshold.

Under this arrangement, the bonus has to be paid within 180 days of the end of the year.
If it is paid after 2005, Evans says, it isn’t taxable to the owner-manager until 2006, but it can be deducted from the business’s income in 2005. “Overall, the tax rate will be much lower,” says Evans.

> Complete capital acquisitions. Owner-manager clients with a Dec. 31 yearend should complete capital acquisitions, such as furniture, fixtures, computers and equipment, before the end of the year, Mott says. They will obtain the capital cost allowance write-offs for the current tax year. The interest on any financing undertaken to make the acquisitions is also deductible, he adds. IE