Though most of us are already planning our holiday season, it’s never too late (or too soon) to finalize the year-end tax planning. Follow these 10 tips and you won’t miss out on some important tax savings.
Actions to take in your investment portfolio
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Tax-loss selling
When it comes to any form of investment, the rule of buying low and selling high is king. But under certain circumstances, you might be better off to sell low. Tax-loss selling is a strategy that allows you to offset capital gains from an over-performing asset by selling either other assets (underperforming or otherwise) at a loss.
In order to harvest that loss in 2018 (or any of the past three years), you must sell the stock by December 27, 2018 since it takes three business days for the transaction to complete.
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Tax gain donations
If you are charitably minded, and you make yearly cash donations to a charity, why not consider donating stock instead? Give away publicly traded securities (including mutual funds, stocks and bonds) which have accumulated capital gains to a charity or organization with the infrastructure to receive them. Not only will you be able you get a tax receipt worth the fair market value of the security, but you also eliminate having to pay the capital gains tax on that stock, as well.
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Don’t wait until 2019 to make a TFSA withdrawal
If you are planning to make a TFSA withdrawal any time soon, consider making it before this year ends. Whenever a person takes out funds from a TFSA, an equivalent amount of TFSA contribution limit will be added to the next calendar year (if the withdrawal wasn’t used to balance out an over-contribution). Withdraw now, at the end of 2018, and you can contribute the equivalent in 2019.
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Pay investment expenses
If you pay certain investment-related expenses, such as debt incurred for investing purposes or investment counselling fees for non-registered accounts, you can claim these costs as a tax deduction in 2018. Talk to your advisor and ask to pay your bill before year end!
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Offer a loan to cut down on investment income tax
If you belong to a high tax bracket (congratulations by the way), it might be a good idea shift your investment earnings to a family member who is in a lower tax bracket. Of course, you can’t just simply give that investment money to your family member, since the income for from the investment fund could be attributed to you, and taxed at your higher marginal tax rate. Instead, lend those funds to your lower tax bracket family member. As long as the interest rate on that loan is at least the same as the government’s prescribed rate (which is currently 2%), then invested sum is considered to be a taxable sum under your family member’s tax rate.
Better still, if you make that loan before year-end, that 2% interest rate will remain fixed throughout the duration of the loan, regardless of any future changes on the prescribed rate. Just remember, that the interest on that loan must be paid annually by January 30 in order to avoid attribution of income for the next and upcoming years.
Actions to take with your registered plans
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Wait until January to make RRSP withdrawals
It’s possible to withdraw tax-free funds from an RRSP through the Home Buyer’s Plan (up to $25,000 if you qualify as a first time buyer), or under the Lifelong Learning Plan (with an upper limit of $20,000 used to pay for university, colleges, trade schools and other forms of post-secondary education). With either plan, you must pay back any funds you withdrew in the form of yearly instalments.
In the case of the HBP, you must start making your payments on the second year after the withdrawal, whereas under the LLP, instalments begin on the fifth year after the first LLP withdrawal. If you’re considering making a withdrawal under either of these two plans, you can delay your repayments by one year if you simply wait a few days until we are in early 2019.
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Convert your RRSP to an RRIF if you just turned 71
If you finally turned 71 in 2018, then December 31 is the final day in which you can make a contribution to your RRSP, before it needs to be converted into an RRIF. This is when it pays to do a bit of math. If you earned income in 2018 that would generate RRSP contribution space for 2019, then it may be a good idea to make an overcontribution to your RRSP in December before converting your RRSP to an RRIF.
Yes, you will pay a monthly penalty of 1% on that over-contribution for the month of December, but that penalty would only apply for one month and then disappear in January when the new RRSP space is created. After that, you could simply deduct your over-contribution on your 2019 tax return.
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Convert part of your RRSP into an RRIF at age of 65
Though you’re not obligated to convert your RRSP into an RRIF until the end of the year in which you turned 71, there is an incentive to convert at least part of it at the age of 65. By doing so, you could take advantage of the $2,000 federal pension income amount (as long as you don’t have other sources of pension income). This strategy works because RRIF withdrawals qualify for that credit once you’re 65 years of age or older, while RRSP ones do not.
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Plan for your children’s future (and save on taxes)
Registered Education Savings Plans (RESPs) give you the opportunity to save up for your children’s post-secondary education through a tax-efficient savings plan. The federal government can provide a Canada Education Savings Grant (CESG) for up to 20% of the first $2,500 of yearly RESP contribution per child, or $500. If your child or grandchild is less than seven years away from turning 17, and you haven’t maximized your RESP contributions, consider making one before December 31 to take advantage of any CESGs available to you.
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Contribute to a Registered Disability Savings Plan (RDSP)
RDSPs are tax-deferred savings plans intended to help parents and others to save up money to care for a person who is eligible for the Disability Tax Credit. Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) can be deposited directly into the RDSP until the beneficiary turns 49.
The government could then contribute up to a maximum of $3,500 CDSG and $1,000 CDSB annually, depending on the net income of the beneficiary’s family. Investors who qualify and wish to make a contribution to an RDSP must do so by December 31 if they want to get this year’s government assistance. Also, keep in mind that in 2008, there was a 10-year carryforward of CDSG and CSDB entitlements. Some beneficiaries who were eligible for the Disability Tax Credits since 2008 may be liable to lose some CDSG and CSDB entitlements starting in 2019.
As with all things financial, this information is meant only for illustrative purposes. For specific advice, please talk to a tax professional or consult your financial advisor.
About the Author
Calum Ross has funded over $2.5 billion in mortgages. He is the Amazon and Globe & Mail bestselling author of The Real Estate Retirement Plan with plans to launch an updated version of the book in 2019. Calum is a leading authority on personal finance and investing in real estate and has spoken on stages across Canada and the U.S. He is an alumnus of Harvard Business School and holds an MBA in finance from the Schulich School of Business. He lives in Toronto.
Our team is focussed on mortgage solutions tailored toward building client’s net worth and integrating their mortgage with their longer term financial plan. The team has specific expertise on borrowing to invest in real estate and other investment assets. Call our office today to discuss how we can help at 1-855-410-9905 or email ClientCare@MortgageManagement.ca.