For tax geeks everywhere, December can mean only one thing — year-end tax planning. It’s time to dust off some old tips and add some new ones to ensure you take advantage of all tax saving strategies available to you in 2010.
This year I’ve divvied them up between investors and business owners.
Turn losing investments into potential savings
Tax-loss selling is the practice of selling securities that are in an accrued loss position at year-end in order to offset capital gains realized earlier in the year. When tax-loss selling, to guarantee that a trade of public securities is settled in 2010, the trade date must be Dec. 24, 2010 or earlier. This ensures the settlement takes place in 2010 and that any losses realized are available to you this year. Any trade made after Dec. 24, 2010 will not settle until 2011 and therefore those losses would not be available until next year.
If you’re hopeful that a losing investment will recover and you’re thinking of buying it back shortly after selling, be wary of the “superficial loss” rule. A superficial loss occurs when you sell an investment to realize the loss only to buy it back within 30 days after the sale date. The Canada Revenue Agency can deny a superficial loss and instead add it back to the adjusted cost base (tax cost) of the repurchased security, meaning the benefit of the capital loss can be obtained only when the repurchased security is sold again and not repurchased within 30 days.
Spread some goodwill
Dec. 31 is the last day to make a donation and get a tax receipt for 2010. Keep in mind that gifting publicly traded securities, mutual funds or segregated funds with accrued capital gains to a registered charity not only entitles you to a tax receipt for the fair market value of the security or fund being donated but eliminates any capital gains tax as well.
Pay any investment expenses by Dec. 31
To deduct investment-related expenses on your 2010 tax return, the amounts must actually be paid by Dec. 31. These expenses can include: interest paid on money borrowed for investing, investment counselling fees for non-registered accounts, professional accounting services for tracking rental or business income as well as safety deposit box rental fees.
Consider a prescribed rate loan at 1%
The current prescribed interest rate is set at the record low of 1% until at least Dec. 31, 2010 providing couples with a significant income-splitting opportunity.
Under this strategy, the higher-income spouse or partner loans funds to the lower-income spouse at 1%, with interest paid annually by Jan. 30 of the following year.
As long as the loan is made by Dec. 31 while the prescribed rate is still at 1%, any investment returns above this rate can be taxed in the hands of the lower-income spouse or partner. Even though the prescribed rate varies quarterly, once you’ve set up the loan at 1%, that rate stays in effect for the duration of the term of the loan.
Purchase business assets
If you’re self-employed or a small business owner, you may wish to consider accelerating the purchase of new business equipment or office furniture that you may have been planning to purchase in 2011. Under the tax rules, you are generally permitted to deduct, under the “half-year rule,” one half of a full year’s tax depreciation in 2010, even if you bought it on the last day of the year. For 2011, you can then proceed to claim a full year’s depreciation.
For computer equipment purchased before February 2011, you can write off 100% of the cost in the year of acquisition — with no half-year rule.
Rethink year-end compensation
If your business is incorporated and you are facing an approaching Dec. 31 corporate year-end, you may wish to revisit your salary-dividend mix for 2010. It may make more sense for small business owners to pay themselves exclusively through dividends rather than salary or a final bonus in 2010. While this precludes them from making an RRSP contribution next year as dividends are not considered “earned income,” they may be better off saving money inside their corporations rather than inside an RRSP.
Be sure to check with your accountant and inquire about the potential tax savings advantage dividends may offer over salary and about the tax-deferral advantage of leaving funds inside the company as opposed to paying them out immediately.
Have your corporation reimburse rewards-paid travel
If you used personally earned credit card rewards points, such as Aeroplan Miles, to travel for business, have your corporation reimburse you for the value of the travel. Your corporation can deduct the expense, being the fair market value of the travel, and it’s non-taxable to you personally.