Year-end tax tips for employees
It’s the holiday season, complete with gift lists and festive trimmings. But along with the festivities, we should also try some year-end tax planning to trim our 2016 tax bill. Don’t worry, there’s plenty to go around for both employees and business owners. But don’t delay. For some items, you have only until Dec. 31 to take action. Here’s a summary of what employees can do to save on tax this year-end.
Some may think that employees have only a limited ability to do year-end tax planning. But there are actually more opportunities than you might think. All it takes is a little digging and persistence.
Reducing your source deductions
For employees, one unlikely source of cash could be the source deductions withheld on your paycheque. Many people regularly get tax refunds because of deductions such as support payments, carrying charges on investments, and so on. If you’re one of them, call the payroll division of your local tax office. Tell them you want to apply for a reduction of source deductions under section 153(1.1) of the Income Tax Act (if you cite the section number, they’ll know you mean business). They’ll send you a form and ask you for some info to back up your application. If you do, they’ll probably cut your withholding amount. You pocket the money instead.
Most tax offices are quite cooperative when it comes to this procedure. According to the Canada Revenue Agency (CRA), there is no specific minimum amount that they will not consider on an application. Technically, you are supposed to show that you’d be a hardship case without a reduction, but the CRA seems to be pretty easy on this requirement.
* Early RRSP contribution. One item that may earn you a cut in source deductions is an early 2017 RRSP contribution. Contributing early in the year also means your earnings will start compounding tax-sheltered in the RRSP sooner.
* Warning: If you are basing your application on reducing source deductions on a tax shelter, questionable deduction, or other aggressive tax planning, your application could bring unwanted scrutiny. Better to leave well enough alone.
More timely tips
* Defer income. If possible, you should defer the receipt of employment income if your tax bracket will be lower in 2017.
* Capital Cost Allowance. Employees are entitled to claim tax depreciation (Capital Cost Allowance, or CCA) on automobiles, aircraft, and musical instruments, depending on the circumstances. If you’re entitled to deduct CCA and you’re considering purchasing a new asset, you should do so prior to the end of the year. This will accelerate capital cost allowance claims by one year. The asset must actually be available for your use to qualify for a CCA claim.
Employee auto expenses
* Reduce “operating cost” tax. If personal use of a company-owned car is less than 50%, consider notifying your employer by December 31 if you want the taxable operating cost benefit based on one half of the standby charge, less any disbursements you paid.
Other ways of reducing your operating benefit include reimbursing your employer for operating costs, reimbursing your employer for 100% of the personal use portion of actual operating costs, and minimizing your personal driving.
* Reduce “standby charge” tax. Standby charges are calculated using the vehicle’s original cost. After a few years, when the value of the vehicle lower, consider buying it from your employer to avoid the high standby charge. Alternatively, have your employer sell the automobile and then repurchase it, lease it back, or choose a less expensive car.
Previously published in The Fund Library on December 12, 2016 by tax and estate planning lawyer, Samantha Prasad.