June 22, 2012
Canadians are in danger of paying more taxes than necessary if they put off reviewing their potential tax savings strategies for the 2014 tax year until the spring, says CIBC's tax and estate planning expert Jamie Golombek.
"Instead of waiting until April to think about tax planning, now is the time when Canadians can take advantage of year-end tax strategies to reduce their 2014 taxes," he says. "Since these tax strategies need to be implemented by December 31, it's important to act now, especially before the holidays start."
Mr. Golombek offers six tax strategies below that are detailed in his new report, ‘2014 Year End Tax Tips.’
"These tips highlight just a few of the ways you can act now to benefit from tax savings when you file your return next spring, but keep in mind that tax planning is a year-round affair," he says. "Speak to your tax advisor on a regular basis to take advantage of all tax-saving opportunities available to you."
Consider tax-loss selling
For a capital loss to offset gains on this year's tax return, the settlement date must take place in 2014. This means the trade must occur no later than December 24 this year (to allow three days for settlement). If you plan to repurchase a security you sold at a loss, beware of the superficial loss rules that prohibit selling property for a loss and buying it back within 30 days of the sale date.
Use a prescribed rate loan for income-splitting
You can split your investment income with family members (such as your spouse, common-law partner or children) in a lower tax bracket by lending funds to them using the federal government's "prescribed rate," which is currently one per cent until the end of 2014. If you take out a loan before the end of the year, the one per cent interest rate will be locked in for the duration of the loan, regardless of future prescribed rate hikes.
It's also beneficial for couples with children under 18 to review their income-splitting options in light of the recently announced Family Tax Cut, which provides a non-refundable credit of up to $2,000, says Golombek.
Convert your RRSP to a RRIF by age 71
If you turned 71 in 2014, you have until December 31 to make any final contributions to your Registered Retirement Savings Plan (RRSP) before converting it into a Registered Retirement Investment Fund (RRIF) or registered annuity. It may be beneficial to make a one-time overcontribution to your RRSP in December before conversion if you have earned income in 2014 that will generate RRSP contribution room for 2015.
If you have a younger spouse or partner, you may also want to consider making contributions to a spousal RRSP until the end of the year your spouse or partner turns 71.
Review your investments
Non-registered investments – Year end is an excellent time to review the types of investments you hold. For instance, in non-registered accounts, capital gains are typically taxed at a lower rate than both interest income and dividends. Consider whether tilting a non-registered portfolio towards investments that have the potential to earn capital gains is the right move for you in 2015.
RRSP contributions – Although you have until March 2, 2015, to make RRSP contributions for the 2014 tax year, contributions made as early as possible will maximize tax-deferred growth.
Tax-Free Savings Account contributions – When you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated, but only in the following calendar year, and assuming the withdrawal was not to correct an overcontribution. If you are planning a TFSA withdrawal in early 2015, consider withdrawing the funds by December 31 so you don't have to wait until 2016 to re-contribute that amount.
Contribute to a Registered Education Savings Plan (RESP)
Each beneficiary of an RESP who has unused Canada Education Savings Grant (CESG) carry-forward room can receive up to $1,000 of CESGs annually, with a $7,200 lifetime limit. If you have fewer than seven years before your child or grandchild turns 17 and haven't maximized RESP contributions, consider making a contribution by December 31.
Donate to charity and pay all tax-savings-eligible expenses by December 31
Instead of donating cash, consider gifting publicly-traded securities or mutual funds, with accrued capital gains to a registered charity. This not only entitles you to a tax receipt for the fair market value of the security being donated, it also eliminates capital gains tax. December 31 is the last day to make a donation and get a tax receipt for 2014.
Whether it's medical or childcare expenses, or the interest paid on student loans or on money borrowed for investing, these all must be paid by year end to claim a tax deduction or credit in 2014.