By: Robert Catalano
As year-end approaches, taking some time to review your financial affairs may yield significant tax savings. To ensure that you leave no stone unturned, I have summarized some common year-end tax planning strategies in this article.
Review your portfolio for tax loss selling opportunities
If you have sold some assets and realized capital gains during the year, and you are holding other securities with unrealized losses, consider selling them as well. This “tax loss selling” strategy of selling securities at a loss to offset other capital gains realized during the year is a common year-end tax planning technique.
Year-end bonus planning
Receiving a bonus prior to year-end creates additional RRSP deduction room for 2014 if you have not yet reached the maximum 2014 RRSP deduction limit. Furthermore, receiving a bonus prior to year-end may also allow greater employee/employer pension and/or employee profit sharing plan contributions for 2014 if these contributions are based on the prior year’s total compensation. However, if you will be receiving a year-end bonus, consider deferring the receipt of your bonus (if your employer permits) to early 2014 if you expect to be in a lower tax bracket next year. If the bonus is paid directly to you, there will be withholding taxes at source on the bonus payment. However, if your employer permits, some or all of the withholding taxes on the bonus can be avoided if it is transferred directly to an RRSP. You must have adequate unused RRSP deduction room in the year of transfer.
If you expect to be in a lower marginal tax bracket in 2013 (i.e., you will be earning less than approximately $40,000 of taxable income) but expect to be in a much higher marginal tax bracket in retirement, then you may want to consider making an early withdrawal from your RRSP before year-end. In general, this strategy only makes sense for those individuals who are primarily growth investors outside their RRSP and are nearing retirement. The advantage of this strategy is that you can avoid a higher income tax rate on these RRSP funds if they are withdrawn in the future when your marginal tax rate may be higher. Furthermore, if the RRSP funds withdrawn are reinvested in a non-registered account, you can take advantage of the preferred income tax treatment on capital gains, Canadian dividends and return of capital. The drawback of this strategy is a prepayment of income tax and lost tax deferral on the RRSP funds withdrawn.
Making a charitable donation is one of the ways that you can significantly reduce the personal tax you pay. The final day to make contributions to a registered charity in order to claim the donation tax receipt on your 2013 income tax return is December 31, 2013.
If you have not yet done so, you can now make your Tax-Free Savings Account (TFSA) contribution for 2013 (up to $5,500) and catch up on unused contribution room from 2009-2012 (up to $5,000 per year). The TFSA enables you to earn tax-free investment income, including interest, capital gains and dividends, which will result in greater growth compared to a regular taxable account.
Defer mutual fund purchases
If you purchase mutual funds near year-end in a non-registered account, you may face an unexpected tax liability next April. During the year, a mutual fund will earn taxable income and realize taxable capital gains, some of which will not be taxed at the mutual fund level but instead will be distributed to the unit holders. This distribution is made to all unit holders at a certain point in time, often on December 15, even if a unit holder only just recently purchased the units. Therefore, if you purchase mutual fund units just prior to the distribution, you will pay income tax on the full distribution amount even though the overall value of your holdings may not have changed.
These are just some of the tax planning strategies we can implement before year-end. Prior to implementing any strategies contained in this article, individuals should consult with a qualified tax advisor, accountant, legal professional or other professional to discuss the implications specific to their situation. To get a free review of your portfolio, please contact me at 514-874-7450 or Robert.firstname.lastname@example.org for a personal financial review.