Five year-end tax tips to save you money next spring
With just a few weeks to go until the curtain falls on 2011, you still have time to squeeze in some yearend tax planning between those trips to the mall and the holiday parties. Time spent doing some planning before Dec. 31 can reap huge rewards come next April. Here are five things to consider:
1. TAX-LOSS SELLING
Tax-loss selling involves selling investments with accrued losses at year-end to offset capital gains realized elsewhere in your portfolio. Any capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset capital gains in other years. Due to Canada's strengthening dollar, securities you purchased in a foreign currency may actually be in an accrued loss position once you take the foreign exchange component into account. To ensure your loss is immediately available for 2011 (or a prior year), the settlement must take place in 2011, which means the trade date must be no later than Dec. 23, 2011. While it may be tempting to transfer an investment with an accrued loss to your registered retirement savings plan or tax-free savings plan to realize the loss, without actually disposing of the investment, such a loss is specifically denied under our tax rules. New legislation introduced this year for RRSPs and registered retirement income funds and in 2009 for TFSAs also results in harsh penalties for "swapping" an investment from a non-registered account to a registered account for cash or other consideration. To avoid these problems, consider selling the investment with the accrued loss and contributing the cash from the sale into your RRSP or TFSA. Your RRSP or TFSA can then buy back the investment after the 30-day superficial loss period.
2. PLAN YOUR CONVERSION OF RRSP TO A RRIF
If you turned age 71 in 2011, you have until Dec.31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity. You may also want to consider a one-time overcontribution to your RRSP in December before conversion if you have earned income in 2011 that will generate RRSP contribution room for 2012. While you will pay a penalty tax of 1% on the overcontribution (above the $2,000 permitted overcontribution limit) for December 2011, new RRSP room will open up on Jan. 1, 2012, so the penalty tax will cease in January 2012. You can then choose to deduct the overcontributed amount on your 2012 (or a future year's) return. This may not be necessary, however, if you have a younger spouse or partner, since you can still use your contribution room after 2011 to make spousal contributions until the end of the year your spouse turns 71.
3. REVIEW ASSET ALLOCATION
Investment income can be taxed in different ways, depending on the type of income (e.g. interest, Canadian dividends or capital gains), and the type of account in which investments are held (non-registered or registered). Year-end is an excellent time to review the types of investments you hold, and the accounts in which you hold them. In non-registered accounts, eligible Canadian dividends are still taxed more favourably than interest income due to the dividend tax credit. However, the tax rate on eligible dividends is increasing. Looking ahead to 2012, in all provinces except Alberta, the highest marginal tax rate on eligible dividends will exceed the highest marginal tax rate on capital gains. Consider whether tilting a non-registered portfolio toward investments that have the potential to earn capital gains is the right move for 2012.
4. CONTRIBUTE TO AN RESP
RESPs allow for tax-efficient savings for children's postsecondary education. The government provides a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 of annual RESP contributions per child or $500 annually. While unused CESG room is carried forward to the year the beneficiary turns 17, there are a couple of situations in which it may be beneficial to make a 2011 RESP contribution by Dec. 31. Each beneficiary who has unused CESG carry-forward room can receive up to $1,000 of CESGs annually, with a $7,200 lifetime limit, up to and including the year in which the beneficiary turns 17. If enhanced catch-up contributions of $5,000 (i.e. $2,500 X 2) are made for just over seven years, the maximum CESG will be obtained. If you have less than seven years before your child turns 17 and haven't maximized RESP contributions, consider making a contribution by Dec. 31. Also, if your child or grandchild turned 15 in 2011 and has never been a beneficiary of an RESP, Dec. 31 is your last chance to contribute at least $2,000 to an RESP to collect the 20% CESG for 2011 and create CESG eligibility for 2012 and 2013.
5. ENSURE CERTAIN PAYMENTS ARE MADE BY DEC. 31
Dec. 31 is the last day to make a donation and get a tax receipt for 2011. Keep in mind that many charities offer online, Internet donations where an electronic tax receipt is generated and e-mailed to you instantly. Gifting publicly traded securities, including mutual funds, with accrued capital gains to a registered charity or a private foundation not only entitles you to a tax receipt for the fair market value of the security being donated, it eliminates capital gains tax, too. Certain expenses must be paid by year-end to claim a tax deduction or credit in 2011. This includes investment-related expenses, such as interest paid on money borrowed for investing, investment counselling fees for non-RRSP accounts, and safety deposit box rental fees. Other expenses that must be paid by Dec. 31 include child-care expenses, medical expenses, interest on student loans, and spousal support payments.