Year End Tax Planning Tips
With 2013 drawing to a close and the holidays coming fast and furious, Canadians need to ensure they do not get so caught up with the excitement and chaos of the season that they neglect crucial year-end tax planning strategies, many of which need to be implemented by December 31st to be effective. What follows are the five most important strategies to focus on over the months ahead.
1. Tax-Loss Selling
“Investors and high income professionals need to keep in mind that December 31st is also the deadline for tax loss selling and the purchase of certain tax shelters, such as flow through limited partnerships. For selling capital property, it normally takes three business days to settle a trade, so don’t wait until the last minute. Aim for December 24th if you want to ‘crystallize’ capital gains or losses on individual stocks, equity mutual funds or similar assets. Be aware of the superficial loss rules which limit the deductibility of a loss if, within 30 days before or after the sale, the same or identical properties are acquired by you or an affiliated person” says Geoff Bustin, CA with Williams & Partners.
2. Retirement Considerations With the first wave of baby boomers turning 65 this year, here are some tips for retirees.
Convert your RRSP to a RRIF by age 71 If you turned 71 in 2013, you have to make your 2013 RRSP contribution prior to converting to a RRIF which must be completed by December 31, 2013. The rest of us have until Monday March 3, 2014 to maximize our RRSP contributions.
Old Age Security (OAS) benefits If you turned 65 in 2013 and have not yet applied for OAS benefits, you should do so as soon as possible since retroactive payment of benefits is limited. You must meet certain residency requirements to be eligible for the benefits and OAS payments are “clawed back” (reduced or eliminated) if your net income exceeds $70,954 in 2013.
3. Review asset allocation Investment income can be taxed in different ways, depending on the type of income (e.g. interest, Canadian dividends, or capital gains), and the type of account in which investments are held (non-registered or registered). Year end is an excellent time to review the types of investments that you hold, and the accounts in which you hold them.
If you are planning a TFSA withdrawal in early 2014, consider withdrawing the funds by December 31, 2013, so you do not have to wait until 2015 to re-contribute that amount.
4. Contribute to an RESP & RDSP
Registered Education Savings Plans (RESPs) December is also the deadline for making contributions to a Registered Education Savings Plan (RESP). The first $2,500 of the annual RESP contribution per child qualifies for the 20% Canadian Education Savings Grant – a $500 freebie you won’t want to miss out on.
Registered Disability Savings Plans (RDSPs) If your child has a disability, you may be allowed to establish a Registered Disability Saving Plan (RDSP). Like RESPs, contributions to RDSPs will not be tax-deductible, but investment income can be earned in the plan tax-free. Investment income, but not contributions, will be taxable to the beneficiary when it is paid out of the RDSP - up to $200,0
5. Ensure certain payments made by December 31st
Medical expenses, charitable donations, political contributions, moving expenses, child care, certain child and spousal support payments, union and professional membership dues, tuition fees, interest on student loans, safety deposit box fees, prescribed interest payments on spousal loans and investment counsel fees should be paid before December 31, 2013. To ensure that all appropriate paperwork is in place, target November 30th as your completion date.
If you own a business, Tim Laceby, CA, CPA of DNTW Toronto suggests that “If your year end is approaching and you are considering acquiring new equipment for your business, purchasing it towards the business’ year end will generally accelerate your depreciation tax deduction. The personal tax rates on small business dividends are going up in 2014. If your compensation for 2014 will include dividends from your small business corporation, consider taking the dividend this year to pay less personal tax on the dividend.“
There is no silver bullet to avoid income taxes, however there are many simple strategies Canadians can employ to either defer or reduce income tax payable. To discuss your personal situation further contact our office or your accounting professional.