It’s that time of year again when you still have time to arrange your finances to reduce your income taxes before year end. There are only a few weeks left before the end of the year. Once Jan 1st rolls around it will be time to begin focusing on the next tax year and managing your tax liability. Some tax planning activities apply all year long while others are more specific to the end of the year in terms or tax management. Talk to your tax accountant to review what steps are needed to minimize your tax commitment for the year.
Tax Saving Opportunities
Consider tax reduction strategies that stem from offsetting capital gains with losses, to writing off interest expense, and other certain year-end activities that must be completed by December 31 in order to realize tax savings in 2010.
Here are five year end tips that may help Canadian families and individuals in terms of tax planning. You should always discuss your personal situation with your investment or tax adviser before making any decisions. Individual situations can vary widely and the impact of various strategies can have a wide impact as well, both negative as well as positive.
If you are an American, you may also be able to take advantage of some of these considerations, however you should review your opportunities with a US financial adviser.
Turn losing investments into potential savings
Tax-loss selling is the practice of selling securities which 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 December 24, 2010 or earlier. This ensures the settlement takes place in 2010 and that any losses realized are available to the taxpayer this year. Any trade made after December 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 or your spouse sell an investment to realize the loss only to buy it back within 30 days after the sale date. The CRA 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 only be obtained when the repurchased security is sold again and not repurchased within 30 days.
Turning 71 in 2010, it’s time to convert your RRSP
Canadians with Registered Retirement Savings Plan (RRSP) annuitants who turned 71 in 2010 must convert their RRSPs into either a Registered Retirement Income Fund (RRIF) or a registered annuity on or before December 31, 2010. And if you plan on making any final contributions to your RRSP, you will only have until December 31 to do so as you no longer have the extra sixty-day advantage of delaying until March 1, 2011. If, however, your spouse or partner is under 72, you can continue contributing to a spousal RRSP in his or her name, provided you still have contribution room.
Finally, if you’re 71 and don’t have a younger spouse or partner but still have earned income from 2010 that will create RRSP contribution room for 2011, consider making a deliberate over contribution in December 2010 before converting to a RRIF. While you will pay a penalty tax of 1% on the over contribution for the month of December, when new RRSP room opens up on January 1, 2011, the over contribution problem disappears and you can deduct the 2010 contribution in 2011 or a future year.
Contribute to an RESP to generate future savings
If you have a child or grandchild who has never participated as a beneficiary in a Registered Education Savings Plan (RESP) and who turned 15 sometime in 2010, December 31 is your last chance to contribute at least $2,000 to his or her RESP in order to collect the 20% Canada Education Savings Grant (CESG) for 2010 and create eligibility for CESGs in 2011 and 2012. If you miss the deadline, the child or grandchild will not be eligible for any CESGs in the future.
Spread some goodwill by making donations
December 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 off investment expenses and interest
In order for you to deduct any investment-related expenses on your 2010 tax return, the amounts must actually be paid by year-end (December 31).
Such expenses include interest paid on money borrowed for investing, investment counseling fees for non-registered accounts, professional accounting services for tracking rental or business income and safety deposit box rental fees.
As always, discuss all tax-planning strategies with a financial advisor or tax professional to properly determine your risk and eligibility. There may be other potential tax-savings opportunities depending on your personal situation.