As the holidays approach, so too does December 31st or the end of a calendar year. This date can mean different things to different people. For those in the business of estate and tax planning, the spectre of December 31st often leads to calls from clients who are looking to: complete a project they had on their “to do” list for the calendar year, start a project but have it completed by year-end or ask for reminders about strategies they should be thinking about implementing in order to improve their financial position. While there are many year-end strategies that can be considered, I intend to remind our readers of the few that typically arise in my practice.
The first relates to potentially taking advantage of lower income family members who are beneficiaries of a discretionary family trust. While our tax rules impose a number of limits on the ability to have income taxable in the hands of a lower income family member, there are still some avenues available. In the context of a discretionary family trust that has realized capital gains in a calendar year, it is possible for those gains to be paid or made payable to a minor beneficiary and thereby taxable in their hands, at their presumably lower tax rate. This should allow for tax savings but bearing in mind the minor beneficiary now has an entitlement to the amount that was paid or payable to them. Whether this is available will depend on how the trust was structured and acquired the assets that led to the realized capital gains.
For those of our readers who have loaned funds at the prescribed interest rate in effect at the time of the loan, either to their spouse or to a discretionary family trust, you will recall that it is critical your spouse or the trustees pay you the applicable prescribed rate of interest on the loan by January 30, 2023. A failure to do this could impact the benefits derived from this strategy. So as you start to wind things down for the end of the current year, be sure to take steps to have the interest paid on any prescribed rate loans you have made to your spouse or discretionary family trust.
Being charitable not only provides social benefits to you and your community, but also provides you with tax benefits. If you want to ensure the benefits of your donation is available for the 2022 calendar year, then the last day to make a gift to a registered charity in order to claim the donation tax receipt on your 2022 income tax return is December 31, 2022. While cash donations are easy, donating publicly listed securities in-kind has an added benefit to you. Specifically, you will not have to pay tax on the realized capital gain arising from the donation. Rather, you will get the benefit of a donation that is based on the full fair market value of the security at the time of the donation. But, given the time it takes to physically transfer securities in-kind, the clock is ticking on being able to complete an in-kind gift by December 31st.
I deal with a fair number of clients who are owner-managers of a private company. It is not uncommon for owner-managers to draw on corporate accounts for personal use and create a loan account that is owing to the company. If this is not repaid before the end of the corporation’s tax year after the year the loan was granted, you risk having to include the value of the loan as income on your personal tax return. The upshot is you either want to repay the funds drawn from the company or ensure it is documented and recorded as salary, bonus, dividends or other form of corporate distribution. Similarly, if you have a shareholder account that is owing to you from the company, it is important to keep accurate records of the amount owing to you and to have the liability documented by way of a loan agreement or promissory note.
There are many other year-end strategies that may improve your tax position. As you continue to check off items on your holiday “to do” list, you may want to trip through with your advisor whether there are any strategies that could help you and your family’s financial position. All the best for the holiday season and see you in 2023!