In my many (many) years on this planet, I’ve only met one or two people who claim to be proud and happy about the amount of income taxes they pay. So, let’s see if we can try and reduce your taxes, with some things you can do before the year ends.
In other articles, we have talked about realizing capital losses to offset taxable capital gains and also trying to avoid year-end distributions on mutual funds, private trusts or ETFs.
If you have an investment portfolio, be sure to review those strategies.
The Three D’s of tax planning:
Tax planning starts with remembering to Defer, Divide and Deduct.
Defer could mean waiting until January to sell an investment that has gained in value, delaying the capital gain until the following year.
Deferring withdrawals from RRSPs until January can delay the tax for another year. Keep each individual withdrawal below $5,000, though, as this sets the required income tax withholding to 10%, compared to the 20% or 30% on larger individual withdrawals.
On the other hand, make any required withdrawals from TFSAs before year-end, as this will save a year on putting the money back into a TFSA.
If you are eligible for a year-end bonus at work, or a big contract (in the event being self-employed), or any other form of income over which you might have some flexibility, consider deferring that income into January, if you will be in the same or lower tax bracket next year. If you know your income will be higher, maybe claim the income in the current year.
Divide means splitting income with a spouse or common-law partner, if you have one. The goal is to earn as much of the family’s taxable investment income on the tax return of the lower income spouse. This cannot be done artificially, or you run afoul of the CRA attribution rules. However, having the lower income spouse do all of the non-registered saving and investing, while using the income earned by the higher income spouse for living expenses, will accomplish this legally over time.
If the higher income spouse already has a lot of investment capital, consider a prescribe rate loan, where the lower income spouse borrows the investment capital from the higher income spouse, paying only the CRA prescribed rate of 1%. Get advice.
For retired people, “divide” could mean transferring up to 50% of eligible pension income onto the tax return of the lower income spouse. This is done when you file your tax return, but good to think about now.
Deducting is where you will get the most immediate bang for the buck.
Although charitable donations actually result in a credit against taxes owing, rather than a deduction from taxable income, be sure to make these by December 31. Once you have donated $200 in the year, you receive a credit of over 45% (combined federal and provincial taxes) of the amount you donate. That means $1,000 in donations reduces your taxes by about $450. And those organizations really need your help.
If you have investments that have gained in value, consider having your investment advisor transfer those directly to your charity of choice, as this in-kind donation makes the capital gain on the investment tax free.
If you are self-employed, or an employee eligible for a deduction for employment expenses on commission income, consider incurring any required expenses prior to year end. If you own a private corporation, be sure to consult your tax advisor for opportunities, especially in view of the big changes to private corporation taxation.
Make RESP contributions by year end to attract a Canadian Education Savings Grant, of 20% of the first $2,500 contributed on behalf of an eligible beneficiary.
Pay interest on student loans by year end, for a non-refundable credit, though valuable only if the student is paying taxes.Withdraw from RESPs this year, if the student is attending post-secondary education and not paying tax because of low income and/or tuition credits. This is especially critical if the student has left school, as you only have six months to receive an Educational Assistance Payment taxable to the student instead of the contributor.
Pay any interest on investment loans, make renovations for home accessibility for people receiving the Disability Tax Credit and make the current year contribution to any Registered Disability Savings Plan that is currently open, to attract a grant.
This is not an exhaustive list but should get you thinking. Remember, though, tax planning should be a year-round exercise.
* * *
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Portfolio Manager and Senior Vice President with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.