The end of the year signifies a time of significant spending on gifts, get-togethers, and getaways. By spending some time on your tax and financial affairs now, this time of year can also be a time of significant tax savings. In this month’s Kurve, our gift to you is a year-end checklist of useful tax planning tips to consider before you head into the new year.
Time Sensitive Payments
Consider the timing of your expected payments and expenditures to maximize their tax advantage. Paying for certain expenditures now instead of in 2019 will allow you to reap their tax benefits a year earlier.
If you qualify for the medical expense tax credit in 2018, consider incurring more medical expenses by the end of 2018 versus early 2019 to increase your medical expense tax credit. For example, if you expect to pay monthly instalments for your children’s braces in 2019, consider paying the full amount in 2018. For 2018, the credit claimed for expenses incurred by an individual is the amount of medical expenses in excess of the lesser of: 3% of net income and $2,302.
The last day to make a charitable donation and receive a tax receipt for 2018 is December 31st. An individual may claim donations made either by the individual or his/her spouse or common/law partner. The donation tax credit may be maximized by claiming all donations on one tax return.
Gifting publicly-traded securities, including mutual funds, with accrued capital gains to a registered charity or a foundation not only entitles you to a tax receipt for the fair market value of the security being donated, it eliminates the capital gains tax too.
Consider paying these expenses before the end of 2018 to be able to claim a tax deduction or tax credit in 2018:
- investment-related expenses, such as interest paid on money borrowed for investing;
- investment counseling fees for non-RRSP investments
- child care expenses
- spousal support payments
- student loan interest
Tax Loss Selling
Tax loss selling is a strategy to sell investments (held outside your RRSPs) with accrued losses at year end to offset capital gains realized elsewhere in your portfolio. Excess realized capital losses that cannot be used in the current year may also either be carried back three years or forward indefinitely to offset capital gains in other years. In using this strategy, remember to factor in the effect of foreign exchange on investments purchased in a foreign currency as the gain or loss may be larger or smaller than anticipated. Keep in mind the timing of your sales transactions as the settlement date must take place in 2018.
Investments in Registered Accounts
Optimize the benefits of your registered accounts with these tax savings tips.
Any amounts withdrawn from your TFSA (tax-free savings account) are added back to your contribution room in the next year (assuming the withdrawal was not to correct an over-contribution). If you are planning a TFSA withdrawal in early 2019, consider withdrawing the funds by December 31, 2018 so you will not have to wait until 2020 to re-contribute that amount.
The government allows withdrawals from your RRSP (registered retirement savings plan) without immediate tax consequences under specific plans. The first of these plans, the Home Buyer’s Plan (HBP) allows individuals purchasing their first house to make a withdrawal of up to $25,000 from their RRSP. Similarly, the Lifelong Learning Plan allows a withdrawal of up $20,000 for post-secondary education costs. The catch is that these amounts must be repaid in annual instalments in future tax years, starting with the year after withdrawal. If you are planning on withdrawing funds for either of the above purposes, consider delaying this withdrawal until January 2019 if possible. This will delay the required repayment until 2020, effectively granting an extra year of deferral to the repayment clause.
If your child or grandchild will be turning 17 in the next 7 years, consider contributing to an RESP (registered education savings plan) before the end of 2018 as the federal government will give an annual grant known as the Canada Education Savings Grant (CESG). The CESG is 20% of annual contributions per child up to a maximum of $500 per beneficiary regardless of family income. Additionally, for families with net income between $45,916 and $91,831 there is an additional 10% on the first $500 per beneficiary and an extra 20% on the first $500 per beneficiary if the family’s income is under $45,916.
If you turned age 71 in 2018, you have until December 31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity. It may be beneficial to make a one-time over-contribution to your RRSP in December before conversion if you have earned income in 2018 that will generate RRSP contribution room for 2019. While you will pay a monthly penalty tax of 1 per cent on the over-contribution (above the $2,000 permitted over-contribution limit) for the one month of December 2018, new RRSP room will open up January 1, 2019 so the penalty tax will cease in January 2019. You can then choose to deduct the over-contributed amount on your 2019 or future year’s return.
Split Income Through a Prescribed Rate Loan
If you are in a high tax bracket, consider the benefits of having some investment income taxed in lower-tax bracket family members. This can be done by lending funds to family members at an interest rate that is at least equal to the government’s ‘prescribed rate’ (currently at 2 per cent). If you set up the loan before December 31, the 2 per cent interest rate will be locked in for the duration of the loan term. The family members can then invest the funds with any investment income earned on the funds being taxed in their hands at their lower marginal tax rates. Care should be taken not to simply give funds to family member for the purposes of investment, as the income from the invested funds may then be attributed back to you and taxed in your hands at your high marginal tax rate. Furthermore, ensure interest for a calendar year is paid annually by January 30th of the following year to avoid attribution of income.
Reviewing your tax and financial affairs now will help you avoid surprises later, take advantage of time-sensitive tax savings opportunities, and provide you with a sense of perspective and understanding as you head into the new year. For more information on these tax tips and their applicability to your particular circumstances, or for assistance in developing a personalized and comprehensive financial, tax, and estate plan designed to meet your goals, contact our office. We are here to help.