Time for Year-End Tax Planning is Now

Personal Finance | BCBusinsess

If you think year-end tax planning means taking a few minutes on December 31 to make a few charitable contributions and top up your RRSP, think again

October is far too early to even contemplate year-end tax planning, right? Wrong. Leaving tax planning to the last minute at an already busy time of year creates stress, rushed decisions and potential lost tax-savings opportunities. Here are some things you can do now to maximize your tax savings before the end-of-the-year rush.

Tax-Loss Selling
If you sell an investment in your non-registered portfolio that has lost money, the capital loss can offset any capital gains you may have realized. If you paid tax on capital gains in any of the three previous tax years you can use the loss to recoup some of that tax. Alternatively, you can use the capital loss to offset capital gains in the current tax year or carry it forward indefinitely.
But what if you think the investment will recover? You can still realize the loss, stay out of the investment for 30 days then repurchase the stock.
The best way to avoid being out of the market for the 30-day period is to purchase a proxy—something similar, but not identical, to the security you sold. For example, if you have lost money on your gold stock (and many have), you could sell the gold stock and realize a tax loss then buy a gold exchange-traded fund. After 30 days, you could sell the ETF and repurchase the gold stock.
Note that the tax loss will not be allowed if you try to sell the stock in a non-registered account and re-buy it before 30 days, or repurchase it in a different account (such as an RRSP) or in a spouse’s name.
Charitable Donations
You can, of course, donate cash to a registered charity. But first, review your portfolio. If you have publicly traded shares, mutual funds or segregated funds that have generated a significant capital gain, you may gift any portion of the investment to a registered charity or private foundation. You will get a tax receipt for the fair market value of the donation and can avoid paying capital-gains tax on any of the accrued gains.
The process involves signing a Charitable Donation of Securities in Kind form that you can get from the registered charity or your financial institution.
RRSP Contributions
Although you have until March 3, 2014 to make your contribution for the 2013 tax year, it is always wise to contribute as early as possible in order to reap the benefits of compounding. The 2013 RRSP contribution limit is $23,820.
Tax Free Savings Account Contributions
Introduced by Ottawa in 2009, TFSAs let you earn tax-free investment income. They complement RRSPs as a vehicle for lifetime savings. The TFSA is funded with after-tax dollars, but has the flexibility of allowing you to withdraw your invested capital and the growth of the capital with no tax consequences. Any money withdrawn in one calendar year can be recontributed in the next calendar year.
From 2009 to 2012, the annual contribution limit was $5,000; it was increased to $5,500 a year in 2013. So if you had never made a TFSA contribution and opened one this year, you could put in a total of $25,500 and another $5,500 in 2014.
Review your Asset Allocation
The months before year-end are a good time to review your overall portfolio, particularly if you have numerous accounts with several financial institutions. It is important to know your total asset allocation mix so you can decide if you’re taking more or less risk than you intend.
It’s also time to review what type of investment income you are receiving and the type of account in which the investments are held. Interest income is taxed in most provinces at a significantly higher rate than Canadian dividends and capital gains. Try to keep interest-paying investments inside an RRSP and dividend-paying investments in a non-registered account to enjoy the benefit of the lower tax rate.


Patti Shannon, CFA, is vice-president and portfolio manager of Leith Wheeler Investment Counsel Ltd. This blog is not intended to provide advice, recommendations or offers to buy or sell any product or service.