End of Year Tax Tips

(prepared by The Canadian Institute of Chartered Accountants)

Once again it is time to get ready to welcome the new year. And once again, it is that time of year when you need to think about your personal income taxes and tax planning strategies.

The month of December is an opportune time to ensure you have everything in order for your tax filings for the 2003 taxation year. A few hours of effort now could help you minimize your tax liabilities. And if, like many, you habitually search for your supporting documents only when your tax filing deadline looms on the April horizon, these preparations could also spare you added stress in the new year.

Salaries, Bonuses and Dividends: If you are an owner/manager, review the salary, bonuses and dividends you have received from the company in view of any additional draws or other income and discuss with your accountant. If you have declared bonuses in the last corporate fiscal year-end, talk to your accountant to determine the potential impact on your personal income taxes.

If your business employs your children, spouse or partner, make sure you have copies of their cancelled cheques. If you have been unable to pay them because of poor cash flow, talk to your accountant to determine the best means of rewarding their unpaid efforts. This may be an important consideration for lowering your personal taxable income.

RRSP Contribution: Determine your combined earned income and income from other sources for the year and decide whether you will make an RRSP contribution for 2003. To determine your contribution room, review the 2002 Notice of Assessment that you received from the CCRA.

You should ensure you have sufficient earned income in 2003 to be able to maximize your 2004 RRSP contribution. The maximum RRSP contribution for the 2004 year is $15,500, which requires earned income in 2003 of at least $86,111.

Top up your RRSP contribution for 2003 to take full advantage of this opportunity to accrue tax-deferred earnings in your RRSP investments while receiving an immediate tax benefit for 2003. Consider borrowing to contribute the maximum. Although the interest expense is not deductible, the tax benefits may still outweigh the costs involved.

The deadline for RRSP contributions for the 2003 taxation year is February 29, 2004.

Investment Portfolio: Make sure your investment portfolio is in order and you have records of your investment income and expenses. It may be time to sell stocks that have lost value so you can apply the capital loss against capital gains you have realized this year. If you have borrowed in the past or made new lending arrangements for investments outside of your RRSP, gather your documentation.

Business Loans: Review your documentation for your business loans. Make sure your financial institution or lender has forwarded statements showing the opening balance for 2003, any additional loans, loan repayments, transfers to and from operating accounts, and interest charges.

If you have provided your company with operating funds and/or personally borrowed funds to support the business, gather the loan agreement and supporting documents for repayments and interest expense.

If you have borrowed money from the corporation, consult with your accountant to ensure that account balances have been properly monitored and the loan is repaid within the required period of time.

Automobiles: If the company has purchased, leased and/or sold vehicles, gather all relevant documentation. Ensure you have a record of the odometer readings for vehicles that are transferred and acquired.

Make sure your automobile log is up-to-date with records of your trips for business, including the dates, destination, purpose and total kilometers. If you have forgotten to record some business trips, review your day planner or electronic organizer to determine where you were and then calculate the distance and record the details. Jot down the odometer reading at the end of the tax year.

Self-employment Earnings: If you receive earnings from self-employment, gather and organize your receipts for business travel, office costs, and vehicle expenses as well as your charge card statements, bank statements and line of credit statements. You should also have an auto log, as previously discussed, in which you have recorded your business trips in your car.

Many of the statements that arrive from suppliers, financial institutions and services in the new year are applicable to your 2003 taxable income. Before closing your books for 2003, review the statements and invoices that you receive throughout January 2004.

If your home is your principal place of business, document your home office use to substantiate any allowable deductions for the applicable portion of the rent or mortgage interest, property tax, home insurance, utility bills and maintenance costs.

Capital Purchases: If your cash flow permits, consider purchasing capital assets before the end of December to maximize the allowable capital cost allowance (CCA) that can be claimed. Generally, a portion of the capital cost is deducted over a period of years according to the CCA rules. Since only one-half the normal CCA may be claimed in the year of purchase, it is advantageous to make that purchase in December before your year-end so you can claim the half-year CCA even though the asset was owned for less than a month.

The Year in Review: Has your business had a good year? Or a bad year? Compare your operating results with those of the past two or more years. This process can help you prepare a realistic operating income and expense budget in view of your goals for next year.

Talk to Your Accountant: Your accountant can help you plan for the coming year based on current year sales, cost of sales, profits and draws. This is also an opportune time to discuss any outstanding business issues as well as determine your plans for maximizing your tax planning strategies for 2004.