Year-End Tax Planning Insights with McGovern Hurley’s John Mendis

In this Snippets episode, Leon Goren sits down once again with John Mendis, tax partner at McGovern Hurley, for a timely conversation on year-end tax planning strategies for individuals and business owners. With December 31st fast approaching, John shares practical reminders and actionable insights to help listeners make informed tax decisions before the deadline.

Learn about key personal tax considerations such as TFSA versus RRSP planning, tax-loss harvesting rules, and charitable giving strategies. John also dives into important corporate tax topics, including shareholder loans, salary versus dividend planning, bonuses, and common pitfalls business owners should watch for as the year closes.

Tune in for a comprehensive overview of smart, proactive tax planning.

Transcript

 Special thanks to Cleveland Clinic for helping bring you today’s PEO Leadership’s Snippets Podcast.

 Welcome to our snippets podcast. I'm Leon Goren, CEO, and President of PEO Leadership North America's premier peer-to-peer network and leadership advisory firm. Today I am very excited to welcome John Mendis, tax partner at McGovern Hurley. John has extensive experience in tax planning and advisory services, helping businesses navigate the complexities of tax compliance and strategy.

McGovern Hurley, a leading mid-market accounting firm, is known for its personalized hands-on approach, offering a wide range of services including audit, tax, and advisory solutions.

John, it's great to have you on with us again. 

Thank you for having me, Leon. It's a great pleasure. I love to do this.

Excellent. So we're coming up, it's December, holidays are approaching really quickly. December 31st, more importantly, is approaching really quickly. And I just thought we'd sort of put out a couple of insights, maybe some reminders to our members, whoever's listening to us around year end approaches. What can we do from a tax perspective?

So first question to you is, thinking about it from a personal perspective, what are two or three sort of personal tax moves these individuals should be thinking about before December 31st? Yeah, absolutely. Great question Leon. And the biggest thing of course for many individuals  thinking about year end and tax planning, is your RRSP side, the Registered Retirement Savings Plans  if you want to contribute it.

And this year you do have time till March 2026 and I believe the due date is March 2nd, 2026 because the weekend on end of February falls in a weekend, so it goes to March 2nd. And, what you gotta do is you gotta take a look at your notes of assessment  to see what the RRSP contribution limit is.

The maximum amount per year is around 32,000, but it could be much more higher for you if you haven't contributed in the past. So that would be the number one thing. Taking a look in terms of your RRSP side of it, if you should look to maximize that as an individual, that I would say probably the first thing that comes.

To my mind in terms of an individual tax planning aspect of, the other part is that you gotta look at your portfolio of securities and think about that are things outside of your registered accounts. And if you're thinking about there's, accrued losses and gains, you gotta talk with your portfolio advisor and try to kind of maximize in terms of if you're gonna sell some of these securities, if there's any way to.

Reduce your tax burden. Maybe there are some loss securities you can sell, but keeping in mind that you should not buy those securities for 30 days after those are sold. Otherwise, that loss could be denied. So be very careful of that by just kind of having those discussions to ensure that everything's good.

Another big item is the charitable contributions. A lot of folks think about the donations and they want to get a tax credit. So if you want to do that, you gotta make sure you're looking at that as well. One of the other thing you could also do is donate in-kind securities. So if you were to do that, there would be no capital gain, but at the same time you are gonna get a donation tax credit.

So that's a fantastic way to go about not paying capital gain tax, but at the same time getting a donation tax credit. So I would say those are probably the biggest items individuals should really focus on maybe the top three on the tax harvesting on the losses, right? Mm-hmm. You say you can't buy those securities per, it was interesting 'cause I looked at this this past year too, on my investments.

It's not that you can't just buy it again, you can't buy it in anything you're affiliated with. Yeah, no, that is correct. Yeah, it is just that same security and if you're affiliated with it, you can't really buy it. But after that time free period has lapsed, then you could buy. So you gotta be very careful with that as well.

If you're trying to dispose of it and quickly buy it again,  you cannot do that and use that tax planning for your advantage. And is it 30 calendar days or 30 business days that you can 30 calendar days. Okay, that's great. The other question I had was RSPs versus TFSAs. Mm-hmm. If you only had so many dollars to contribute, I mean, which one would you do?

Yeah, I mean, that's a great question as well, but that really depends on your goals as well. If you have saving, for example, for a temporary thing that it's gonna come up in the next few years, tax re savings account is probably the best way to go. Remember when you put money into the tax re savings account, you're not getting a tax deduction.

But if you're thinking of the long-term future, or if you're thinking of buying a house for the first time, then going the RRSP route might be the best option because you can. Withdraw that funds to buy a home. But compared to the 10 FSA, you could do that too, but you're not getting a tax deduction. So it'll come down to, I would say, your goals, if it's long-term planning, RRSP, if it's a short-term goal that you need some amount of money to invest or do some sort of repair or something like that, tax free savings accounts probably the best way to go for you.

And then my other question to that is, and I think I was sitting in a session. The types of investments you make in that RSP versus your TFSA. Mm-hmm. Income versus capital gains. And just thinking about that, I mean, we're dealing with a lot of people that are very successful here. Should they be thinking about how they choose those securities in terms of what they're investing in?

Yeah, absolutely. I mean, either one, you're not really paying tax. So for example, if you were to earn interest income, personally, let's think about that for one second. If you have the highest tax mar tax bracket in Ontario looking at paying 53.53%, so when you have that money earning interest income in a TFSA or RRSP.

It's a fantastic thing. So either, which one? I would say like trying to maximize income items like that. Like if you have large interest income earning securities and things like that, it's better to have it in those kind of registered account versus like, you know, if you have maxed out on it. And if you thinking of non-registered accounts, then maybe capital gains is the best because capital gains is taxed at the highest.

Marginal rates just around 27%. I was also thinking about exiting, like when you get the money out of the RSP at some point in time. Mm-hmm. Fully taxed on it. Right. Unfortunately that's the case because you're getting a tax deduction when you're contributing, but then the growth is not taxed. But when you do have to pull it out, it's gonna get taxed.

And when you reach age 71, it kind of automatically translate into a registered retirement income fund. Then you'll have a minimum amount that you have to pull out every year. But again, unfortunately, the RRSP withdrawals are gonna be taxable to you. So I come back to that, John, 'cause this is my own head spinning with these different crazy ideas.

Okay. As I said. Because then I don't necessarily want capital gains in my RSP because the capital gains are gonna come out as income. Correct. So I may wanna put the capital, I mean, you don't know, but if you're thinking that way from an investing, maybe shoving it into the TFSA. Where it's tax rate versus understanding that your RSPs is going to hit your income at some point.

That is correct. 

So, exactly. So high rate items, like maybe income earning one or even dividends to a certain extent probably should go on the RRSP. But then again, you know, dividends do, if you do own it in a non-registered account, you get a dividend tax credit and the rates are a little lower. Yeah. But it's still very high.

Right. If you think about the highest marginal rates on dividends from public companies, you're looking at just close to 40%. And if it's from a private company that's playing non-eligible dividends till 48% and in like interest income, earning securities, kind of things like that, 53.53% versus the capital gains mean at 27.

And then the last one on the donations that you talked about, on the charitable better due to personally or through the organization. Through a corporation, I think you mean right? In terms of, yeah, sorry. Yeah. Through corp. Yeah. Yeah, absolutely. I mean, that's a great question as well. Like it all depends to where the funds are.

If you have the funds, personally, the credit could be very high in terms of getting a donation tax credit. So personally, if you can do it, I would say it's better. Then there are opportunities in the corporation too. So if you're thinking of, you know, having securities being donated, perhaps there's an opportunity for you to avoid a capital gain and get a corporate tax deduction.

Remember, when it comes to deductions, the corporations are getting a lower benefit per se. So if you were to think about it that way, a corporation that is eligible for the small business deduction in Ontario, for example, you're paying tax at 12.2%. If you're not eligible for that, you're paying 26.5. But if you're an individual, you could be at the 53.53% marginal rate and the tax credit coming from a donation could be around 40%.

So it's ideal. But having said that, if you don't have the money personally, you have to have figure out a way to take the money out from the corporation, which is either gonna be dividends taxed to you, could be at the 48% rate, but then again, it's still something better because you're getting a larger donation tax credit from it.

What about keeping on that organ corporation side? Is there anything else that would be meaningful for people to think about? Absolutely. There's quite a few things. One of the biggest things that a lot of corporate  owners are doing to us, if they have a fiscal year, end of December 31st, for example, and it's coming to the end of the year, some people have taken money as a loan from a corporation and that loan needs to be repaid.

And a lot of the situations you have to repay one year following the year of borrowing. So if you had borrowed money, you gotta put it back by December 31st, otherwise it becomes income. So there are. Tax planning you could do to convert that into a dividend. But that's coming up. If that's coming up for you, you gotta really wa watch out for that.

I would say that's a big item to kind of look at. If you had taken excess money from your corporation. When is the repayment date? Is it December 31st this year? Then you gotta figure out a plan, speak with your tax accountant, whether it needs to be paid this year or the end of next year. If it's next year, it's fine.

If it's this year, maybe it's time to think whether that amount should be a dividend if you're not putting the money back into the corporation. So that's something to watch out for on the corporate side. Another thing that a lot of people are looking at is the salary dividend mix. A lot of the folks take certain amount of salaries, probably maximizing their Canada pension plan amounts, and sometimes RRSP.

Sufficient room, they'll build a salary and then if they need excess cash, they're looking at dividends. So that's another thing to think about if you need to take out additional funds, whether you should be take thinking about your salary dividend mix. And at the same time, a lot of folks are also thinking whether they should take a bonus.

So bonuses for corporations works in a way that you get the tax deduction now. You don't have to put it into your income until such time you receive it. However, the bonus needs to be paid within six months. So imagine doing a bonus from a corporation with the December 31st. You're getting the full deduction this year, but you don't have to report it in your personal tax return for the 2025 tax return.

You're gonna have to report in the 2026 tax return as long as you pay  that amount by end of June, for example, with these loans that you take from the corp, if you do pay them back. But a couple months later you wanna take another loan. Mm-hmm. Do you run into any problems there? Absolutely, I do. So CRA has a rule for that and they have thought about it.

So a lot of business owners thought about that in the past. They would borrow the money repay just before the end of the year and then take the money back out. That's  in the world of tax call, a series of loans and repayments, then it would be considered income. So that would not work, unfortunately.

Another thing I, I guess I forgot to mention is that if you do take a loan from a corporation, there's an imputed interest benefit that comes into your personal tax return that you gotta pay tax on unless you pay that interest amount to the corporation. Alright. Well I think you gave us a whole bunch of things there.

Yeah. It's like a laundry list of things to consider. Mm-hmm. Which was awesome. Thank you so much for your time today. I know you're, we are December 2nd. You're running away for a few weeks here traveling. Thanks again for sharing all those insights with us. If you have any questions, please feel free to reach out to myself and then I'm happy to connect you with John Mendes directly.

Thank you, Leon. If you're interested in our live webcast, the Way Forward Live and or any other snippets, please take a moment and visit us at peo-leadership.com. You'll find on our site various previous recorded webcasts, which include guests such as Morgan Housel, professor Janice Stein, Harvard, Rosabeth Cantor, Michael Beer, Rob Chesnut, the list goes.

Thank you for joining us today, and we look forward to seeing you again shortly. All the best.