Why Spring tax filing prep should start in November
November is not generally known as tax planning month, but perhaps it should be. While convention has it that the annual ritual of year-end tax planning usually falls in December, many of us are so overwhelmed with holiday parties, shopping and vacations near the end of the year that even the best-intentioned year-end tax plans may go unfulfilled.
As an investor, there are several critical things you may wish to do prior to Dec. 31 to ensure you reap the benefits on your 2014 tax return when you file next spring.
Tax Loss Selling
The stock markets have generally been on a tear for the better part of the past five and half years so it's unlikely you have many investments with accrued losses; however, perhaps you were tempted to buy a penny stock or mining company over the past few years and the investment just hasn't panned out.
If you want to realize that capital loss in 2014 because you want to use it to shelter capital gains you've realized in the year, then you have until Dec. 24 to make any trades to ensure settlement this calendar year. Another reason to consider recognizing that loss in 2014 is if you realized capital gains in 2013, 2012 or 2011 and you wish to apply this year's capital loss against those capital gains to generate a refund of taxes paid in those years.
Of course if you have no capital gains realized in the prior three years, there really is no rush to sell that loser stock for tax purposes, unless, of course, you feel that its value could drop further in the months ahead. You will be able to apply any realized but unused capital losses to offset capital gains in any future year.
One word of caution, however, if you plan to repurchase a security you sold at a loss: beware of the "superficial loss" rule. This rule could apply if you sell a property for a loss and buy it back within 30 days. The rule applies if property is repurchased by you or an "affiliated person," including your spouse or partner, a corporation controlled by you or your spouse, or a trust of which you or your spouse are a majority beneficiary (such as your RRSP or TFSA). Under the superficial loss rule, a capital loss obtained by a sale and repurchase within 30 days will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means the benefit of the capital loss can only be obtained when the repurchased security is ultimately sold (and not repurchased again within 30 days.)
Tax Gain Donating
When thinking about helping your favourite charity towards year end, consider donating appreciated publicly traded securities, mutual funds or segregated funds "in-kind" to the charity of your choice. Not only will you get a donation receipt for the fair market value of the security donated but, under a special tax rule, you will pay no tax on the capital gains. Be sure to check with the charity well in advance to confirm that it can process a gift made in-kind by Dec. 31.
If you're an employee who has received stock options, you can get a similar tax break by choosing to donate the proceeds of option exercise to charity within 30 days of exercise. The normal stock option benefit, equal to the difference between the fair market value of the shares and the exercise price, is generally 50% taxable but if you donate the proceeds to charity, you pay no tax whatsoever on the stock option benefit.
Make sure you pay any of your investment counseling fees and interest on investment loans by Dec. 31 to be able to claim a deduction on your 2014 income tax return. Investment counseling fees for registered plans, such as your RRSP, RRIF, TFSA, RESP or RDSP accounts are not tax deductible.. In addition, the Canada Revenue Agency recently announced that, in its opinion, investment counseling fees paid by an owner of non-registered segregated funds is also not deductible.
Finally, a reminder that, as a result of last year's federal budget, you can no longer deduct the cost of your safety deposit box rental fees.