December 3, 2013 – Personal Income Tax December 2011 Dear Client, Happy Holidays! I would like to take this opportunity to thank you for letting me serve your accounting and tax needs. I look forward to working with you for a prosperous 2012. This blog discusses Year End Tax Tips. While minimizing taxes is important, the year-end tax tips should not take your attention away from making sound economic decisions with your financial planner when it comes to investment strategy.
Personal Income Tax – Year End Tax Tips
Plan to make a tax-free withdrawal from your Tax Free Savings Account (TFSA) before December 31st for that home renovation, winter vacation, or special Christmas present. Withdrawals from your TFSA are added to the contribution room for the following year, so if you’re planning on making a withdrawal, consider doing this before the end of 2011. If you wait until early 2012 to make your withdrawal, you won’t be able to recontribute that amount to your TFSA until 2013.
Continue to contribute to your Registered Retirement Savings Plan (RRSP) if an RRSP is important to you as an investment strategy for your retirement. You are not going to save enough in a TFSA alone for retirement given the low TFSA contribution limits. In addition, tax on withdrawal from an RRSP is a deterrent to spending those dollars prematurely.
Here’s another gift idea with help from the government. Make a contribution to your child’s or grandchild’s Registered Education Savings Plan (RESP) before December 31, and the federal government will grant 20 cents for every dollar contributed, up to an annual limit of $500 for a $2,500 contribution (Canada Education Savings Grant).
Make a contribution to a Registered Disabled Savings Plan (RDSP) designed to provide long-term financial security of a child or adult with a disability before December 31, and the federal government will grant 100% to 300% of RDSP contributions, depending on the beneficiary’s family income, to a maximum of $3,500 annually on a $1,500 contribution (Canada Disability Savings Grant), and up to $1,000 annually in Canada Disability Savings Bonds, depending on the beneficiary’s family income.
Donate to charities by year end to get the donation tax credit – this is worth about 20% in tax savings for a donation under $200, and about 40% in excess of $200. On $1,000 of total donations for the year (which can be combined with your spouse or common-law partner’s donations), your taxes are reduced by $40 on the first $200 (20% x $200) and $320 on the next $800 (40% x $800), so your cost of donating $1,000 to your favourite charities is only $640.
It’s a time of giving but beware of donation schemes – please refer to the CRA website on how to donate wisely and avoid fraud http://www.cra-arc.gc.ca/chrts-gvng/dnrs/rcpts/dntn3-eng.html.
Pull out from Santa’s bag publicly listed stocks and donate them to a registered charity – any resulting capital gain on appreciation of the securities donated is not subject to capital gains tax, and you’re entitled to a donation receipt for the full value of the securities donated for the tax credit. A tax efficient option rather than donating cash to consider!
Ontario introduced the Children’s Arts Tax Credit in 2011, which can reduce your taxes up to $75, or 15% of $500 of eligible expenses for a child (under 16 at the beginning of 2011) for a prescribed program of artistic, cultural, recreational or developmental activity.
Strategize the location of your investments inside and outside your RRSP. Remember that income outside of your RRSP is taxable every year; consider transferring any highly taxed interest bearing investments to your RRSP where income will be sheltered from tax until your retirement. Keeping stocks outside your RRSP allows you to claim capital losses if they arise, and capital gains to be taxed at lower rates than interest income (50% of capital gains are taxed as opposed to 100% of interest income).
If your stocks and investments have appreciated in value, consider the following strategies to defer or minimize the capital gains tax on the sale of those investments:
Delay the sale of those appreciated investments until after 2011; the capital gains tax won’t be payable until April 2013, when you file your tax return for 2012.
If you have capital losses, you may want to sell those appreciated investments before the end of 2011 to use up those losses and reduce the tax on the gains; capital losses can only be used to offset capital gains.
If your stocks and investments have depreciated in value, consider the following strategies to reduce or recover taxes paid on gains realized from the sale of investments:
Trigger capital losses from the sale of those depreciated investments before the end of 2011 to offset capital gains realized during the year or in the prior three years; carrying back a capital loss triggered in 2011 to capital gains that were generated in years 2008, 2009 or 2010, can generate a nice tax refund for you come April.
Trigger capital losses from gifting those depreciated investments to your minor children (under 18 years old) before the end of 2011 to offset your capital gains realized during the year or in the prior three years; if the investment grows in value, and it is sold by your child, it will be taxed in the child’s hands at a lower marginal rate than yours. Note that this only applies to gifting to a minor child, not a spouse.
Consider reinvesting sales of stocks or investments that you have realized in your Tax-Free Savings Account (TFSA) to the extent of your unused TFSA contribution room; future gains from these investments earned in your TFSA would be tax-free.
If you own a business, and your fiscal year end is a calendar year end, make a computer, software and/or furniture and equipment purchase before the end of 2011 so you can get the allowed depreciation deduction sooner than if you waited until the start of next year.
Stay tuned… Have you heard of the 80/20 rule? Learn how you can apply it to your business in my next blog for Small Business Needs. Notice to Reader Dean Constand C.G.A. publishes this newsletter for information purposes only. Feel free to distribute to colleagues and friends. Although the material has been carefully prepared, it is not a substitute for professional advice.