Year-end tax planning: Act now to save later

National Post


It's the most wonderful time of the year! That's right, time to start your year- end tax planning so any strategies that need to be implemented by Dec. 31 to be effective can be successfully launched.

Payments that must be made by Dec. 31

Dec. 31 is the last day to make a donation and get a tax receipt for 2012. Most major charities and foundations offer online donation tools on their websites where an electronic tax receipt is generated and emailed to you instantly. Note that a private member's bill currently before Parliament, if passed, would ext end the charitable donation deadline until the end of February, but it's unlikely to be law in time for the 2012 tax filing year.

There are various expenses you must pay before Dec. 31 to claim a tax deduction or credit in 2012. These include such investment-related expenses as interest paid on money borrowed for non-registered investing, investment counselling fees for non-RRSP/RRIF/TFSA accounts and safety deposit box rental fees.

You may also wish to consider accelerating certain expenses and make payment by Dec. 31 to claim a tax deduction or credit earlier. For example, if you plan to register your kids in swimming lessons or ballet classes for the upcoming winter semester, if you pay for them before year end , those expenses can be claimed toward the 2012 children's fitness or arts credit.

If you're self-employed or a small business owner, you may wish to consider accelerating the purchase of new computer equipment or office furniture that you may been planning to purchase in 2013. Under the "half-year rule," you are permitted to deduct one-half of a full year's tax depreciation (capital cost allowance) in 2012, even if you bought it on Boxing Day. In 2013, you can then claim a full year's depreciation.

Tax-Loss Selling

If you've got investments that are underwater that you are thinking of disposing of in the near future, consider selling them before year- end to harvest the accrued capital losses to offset capital gains realized in 2012. Any capital losses that can't be fully used to offset current capital gains can be carried back three years or carried forward indefinitely to offset capital gains in those other years.

Act by Dec. 24, 2012 to ensure your trade settles in 2012.

Turned 71 in 2012?

If you turned age 71 in 2012, you have until Dec. 31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity as you don't have until the normal March 1, 2013, RRSP deadline.

TFSA Contributions

There is no deadline for making a TFSA contribution. If you have been over age 18 and resident in Canada since at least 2009, you can contribute up to $20,000 to a TFSA in 2012 if you haven't previously contributed to a TFSA. Next year, that cumulative limit will be $25,500 as a result of the recently announced indexation of the annual limit.

If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following cal end ar year. But be careful, because if you withdraw funds from a TFSA and then re-contribute in the same cal end ar year without having the necessary contribution room, overcontribution penalties can result.

Consequently, if you are planning a TFSA withdrawal in early 2013, consider withdrawing the funds by Dec. 31, 2012, so you would not have to wait until 2014 to recontribute that amount.

RESP withdrawals

If your child (or grandchild) is an RESP beneficiary and att end ed a post-secondary educational institution in 2012, consider having Educational Assistance Payments (EAPs) made from the RESPs before the end of the year. Although the amount of the EAP will be included in the income of the student, if the student has sufficient personal tax credits (such as the basic personal amount or tuition, education or textbook tax credits) the EAP income will be effectively tax-free.

Similarly, if your child (or grandchild) is an RESP beneficiary and stopped att end ing a post-secondary educational institution in 2012, EAPs can only be paid out for up to six months after the student has left the school. You may, therefore, wish to consider having final EAPs made from RESPs of which the student is a beneficiary.

Plan for upcoming tax rate increases in Ontario and Quebec

Finally, for high-income residents of Ontario and Quebec, be aware that your tax rates will rise on Jan. 1, 2013. As a result, it may make sense to take advantage of existing lower rates before the increase takes effect.

For example, affected individuals may wish to realize income in 2012 by taking steps such as selling investments with a capital gain, exercising stock options or taking bonuses, where feasible, in 2012 rather than 2013. Owner-managers in Ontario and Quebec may wish to take divid end s from their corporations in 2012. It may also make sense to defer deductible expenses until 2013 where possible.