14 Ways to Reduce Your 2009 Taxes

By Brenda Friedel, CGA
Tax planning is always an issue, whether you work, are retired, operate a business directly or operate a business through a corporation. Here are fourteen interesting ways that may help you save on your 2009 taxes.
1. Contribute to your RRSP
If you haven’t yet made your 2009 RRSP contribution, don’t wait until March 1, 2010 — act now. The earlier you contribute to your RRSP, the more quickly the capital to finance your retirement will grow, sheltered from tax.
Know your 2009 contribution limit.
Your maximum contribution for 2009 is 18% of income earned in 2008, principally from employment or a business, up to a maximum of $21,000 (compared to $20,000 in 2008). The maximum RRSP contribution for 2009 applies to earned income of $166,666 in 2008. If you participate in a pension plan, you should keep the various pension adjustments in mind. To find out the exact amount that you can contribute, look at the “RRSP Deduction Limit Statement for 2009″ section of your federal assessment notice for 2008.
Think ahead to 2010.
The RRSP limit will increase in 2010, when it will reach $22,000. If you operate a business through your own corporation, have no other source of earned income, and are able to do so, make sure that you have paid yourself at least $122,222 for 2009 by the end of December, so that you can contribute the maximum amount to your RRSP in 2010.
Use your unused RRSP contribution room.
If you contributed less than the maximum allowable amount to your RRSP in a previous year, and if you can afford it, use the unused RRSP contribution room for 2009 by contributing an additional amount equal to the unused room. Don’t wait too long to use up unused room, as doing so will give you less time to reap the benefits of untaxed compound interest, and you will have less capital in your RRSP when you retire. Remember that your investment horizon may be for 10 or 20 years, or even 40 years or longer, depending on how old you are now and at what age you think you will need funds from your RRSP.
Don’t over-contribute.
The law allows you to contribute up to $2,000 over the authorized maximum in your RRSP. Do not exceed this limit, because the penalty of 1% per month on excess contributions can add up fast, and the administrative formalities to recover excess contributions are relatively complex. Since the Canada Revenue Agency (CRA) has begun paying much closer attention to excess contributions, do not expect them to go unnoticed.
Consider contributing to a spousal RRSP.
Contributions to a spousal RRSP can be useful. For instance, withdrawals may be made from a spousal RRSP to participate in the Home Buyers’ Plan; thus the more you and your spouse can both withdraw from your respective RRSPs under the Home Buyers’ Plan, the greater the amount you can put down on the home of your dreams. Respect the age limit. If you turn(ed) 71 in 2009, this is your last chance -the age limit for contributing to an RRSP, or indeed withdrawing funds from it or converting it to an RRIF or an annuity, is 71. Your last RRSP contributions, withdrawals and/or conversions must be made by December 31st of the year of your 71st birthday.
2. Split your pension income
Since 2007, tax legislation allows taxpayers who receive pension income to split this income with their spouse when filing their tax return. You can allocate to your spouse up to 50% of your pension income eligible for the current pension income credit in your 2009 income tax return. This could be a valuable strategy if your spouse is taxed at a lower marginal rate, and does not preclude the possibility of contributing to your spouse’s RRSP.
3. Donate
Have you made any donations in 2009? The federal credit is equal to 15% of the first $200 of charitable donations paid in the year and 29% for any donation in excess of $200, except for Quebec residents, for whom the federal credit is 12.53% and 24.22%, respectively. For the territories’ and other provinces’ tax purposes, the credit varies from 4% to 11% for the first $200 and from 11.16% to 21% for amounts exceeding $200; for Quebec tax purposes, the tax credit is equal to 20% of the first $200 and 24% of the excess.
Another very interesting tax strategy, for both you and the charity, is to donate publicly traded company shares from your portfolio, especially if these shares have made a significant gain. No income tax is payable on a capital gain realized when shares of a public listed company are donated to a charitable organization, including private foundations. Under these circumstances, the charity receives a larger amount than it would if you were to sell the shares and donate the proceeds after paying taxes on the gain.
If you have made a charitable gift before the end of the year and have exercised stock options acquired during the same period, then donating these shares to a charity is a very effective tax-saving strategy, since you can deduct the entire benefit you received. This easing measure only applies in respect of shares acquired that were donated in the year of, and in the 30 days after, the acquisition. Under the circumstances, it seems preferable to exercise the options and donate the shares rather than to sell them once the options are exercised and donate the proceeds, minus the taxes related to the benefit. Finally, if you hold shares of public companies in your corporation, and the corporation’s taxable income is sufficient to qualify the donation for a deduction (corporations can claim a deduction of up to a maxi-the mum of 75% of net income but can receive no tax credits for charitable donations), consider donating these shares through your corporation. Generally, the full amount of the capital gain realized by the corporation can therefore, where an election is made, be paid to shareholders tax free.
4. Take advantage of the reduced tax rate on eligible dividends
If you are a shareholder of a Canadian-controlled private corporation (CCPC) and this corporation received taxable income that is not eligible for the small business deduction (excluding investment income) in 2009 or in previous taxation years (as far back as 2001), such income accumulated in a “general rate income pool” (GRIP) represents the balance that may be paid out as eligible dividends. The advantage of eligible dividends is that they are taxed at a lower rate than regular dividends. The lower rate varies from one province to the next. For some provinces, such as Ontario, the benefit increases slightly each year over the next few years. However, the corporation paying the dividend must respect the rules regarding the designation of eligible dividends and ensure that the amount of eligible dividends does not exceed the GRIP. If you hold shares of public companies or other corporations residing in Canada that are not CCPCs, the dividends that you receive will generally be eligible dividends.
5. Claim the $750,000 capital gains deduction
Small business corporation shares, qualified farm property, and qualified fishing property (including, for qualified agricultural and fishing properties, shares of a corporation and partnership interests) qualify for the lifetime capital gains deduction of $750,000 ($500,000 for shares disposed of before March 19, 2007). Claiming this deduction often requires a good deal of planning and help from your tax advisor. If you are thinking about selling assets that qualify for this deduction before the end of the year, consult your tax advisor as soon as possible.
If you have already claimed the $100,000 personal capital gains deduction (abolished in 1994), you are entitled to a maximum deduction of only $650,000. If you plan to use this deduction in 2009, check with your tax advisor to find out whether you have realized an allowable business investment loss in prior years or have cumulative net investment losses as at December 31, 2009. If so, these will be taken into account, and you may not be able to claim the full deduction.
6. Stagger taxation of capital gains
If you dispose of property on which you realize a capital gain, you can stagger the taxation of this gain over a maximum of five years if you allow the purchaser to stagger the payment of the proceeds from the sale over the same period. The term is increased to 10 years for the transfer of farm or fishing property, shares from a family farm or fishing corporation, or from a small business corporation when this transfer is carried out in favour of a child, a grandchild or a great-grandchild living in Canada.
7. Use your capital losses
Under the tax rules, you can use your 2009 capital losses to reduce the current year’s taxes on your capital gains. In addition, you may be able to carry your 2009 capital losses back to 2006, 2007 and 2008, and use it to reduce your capital gains in any of these years. Many taxpayers also sell their investment losses before the end of the year when they have realized significant gains earlier in the year. This strategy is particularly interesting in the present economic context. But be careful! If, within the thirty days prior to or following the sale of an asset that resulted in a capital loss, you purchase an identical asset, the superficial loss rules prevent you from claiming a capital loss on an asset you clearly intended to continue holding. This rule also applies if your spouse or a company under your control purchases the identical asset.
8. Offset taxable income with an allowable business investment loss
Whereas capital losses can be used only to reduce capital gains, an allowable business investment loss (ABIL) can be used to reduce your overall income. Therefore, if you are a shareholder or creditor of a financially unstable private corporation, consider selling your shares or debt to an unrelated person before December 31 to realize an ABIL for 2009. Remember, however, that if you have already claimed a capital gains deduction in the past, the amount of the ABIL is reduced by the claimed amount. Furthermore, pay particular attention to the documentation related to this loss, as the tax authorities could require you to produce it.
9. Repay shareholder loans
If you took a loan from your corporation in 2008, repay it if possible before the end of 2009. If you delay, the full amount of the loan will be added to your income for 2008, unless the loan was made to an employee-shareholder for purchasing a residence, securities issued by the employer, or a car for work purposes. Other restrictions apply to these types of loans, however.
10. Pay a bonus
The federal small business tax deduction (SBD) is available to Canadian-controlled private corporations with active business income of less than $500,000 in 2009 (this amount varies for provincial and territorial taxation purposes). If the active business income derived from your company exceeds the $500,000 threshold, a common suggestion has been that the corporation pay out a bonus to bring its income below the threshold. However, changes to federal and many provincial (including Quebec) corporate tax rates have been announced recently. The implementation of eligible dividends has also affected dividend tax rates. Given these modifications, it is important to ensure that this strategy remains in line with your situation and generates the best tax savings possible. Talk to your tax advisor. If you opt for this solution, your company will be able to claim the tax deduction on the condition that the bonus is paid within 180 days of your corporation’s fiscal year-end.
11. Check whether interest on your loans is deductible
For your loan interest to be deductible from your income for tax purposes, the loan must have been contracted for the purpose of earning income from a business or property. If you are currently paying interest that is not deductible (for example, on a home mortgage loan, on a loan to contribute to your RRSP, or to acquire an interest in a life insurance policy), ask your tax advisor if you could reorganize your business affairs to make the interest deductible. Recent legal precedents and the CRA’s administrative positions regarding interest deductibility should prompt taxpayers at least to review their current situation.
12. Contribute to a registered education savings plan
Although contributions to a registered education savings plan (RESP) are not deductible, the income that accumulates on the capital is only taxable when it is paid out to a student as an education assistance payment. Although contribution limits must be respected, possible federal and provincial grants that are not included in calculating the lifetime contribution limit make the RESP very interesting.
13. Contribute to your tax-free savings account
The 2008 federal budget contained a new tax measure, creating the tax-free savings account (TFSA). Starting January 1, 2009, Canadians who are 18 years of age or over can contribute up to $5,000 per year to a TFSA. This maximum contribution limit of $5,000 will be adjusted annually to reflect inflation. These contributions will not be deductible from income for tax purposes but the investment income earned, including capital gains, will not be taxable, even upon withdrawal. Unused contribution room can be carried forward. In addition, you can make withdrawals from your TFSA at any time and for any purpose. Your contribution will have no impact on your annual RRSP contribution limit. Furthermore, neither the income earned in a TFSA nor withdrawals made from such an account will affect your eligibility to federal credits or benefits based on income.
14. Round up your renovation receipts
The Home Renovation Tax Credit is a non-refundable tax credit based on eligible expenses for improvements to your house, condo, or cottage. It can be claimed on your 2009 income tax return. It applies to work performed or goods acquired after January 27, 2009 and before February 1, 2010. The HRTC applies to eligible expenses of more than $1,000, but not more than $10,000, resulting in a maximum nonrefundable tax credit of $1,350 [($10,000 -$1,000) x 15%)].