Year-End Tax Planning Checklist for Individuals
For some, when the weather turns cold and the holiday descends upon them, it signifies that it is time to turn their attention to structuring their affairs to minimize taxes.
Ideally, tax planning should be done throughout the year as part of one’s overall financial plan. However, if you have not monitored your tax situation throughout the year, here are a few tax tips that will help you reduce your taxes. Your Fuller Landau advisor can help you determine which will work best for you.
Capital Gains and Losses
Consider delaying the sale of securities with accrued gains until the beginning of 2012.
Consider selling securities with accrued capital losses prior to the last settlement date for 2011 (December 23rd) to offset any capital gains realized in the current year or in any of the three preceding years.
Consider selling mutual funds before year-end and delaying the purchase of mutual funds until the beginning 2012 to minimize 2011 income allocations from the fund.
Consider making any planned charitable donations and political contributions prior to the end of 2011 in order to get the deduction in the current year.
Donation of Securities
If you plan on making a significant charitable donation in 2011, consider donating securities of a publicly-traded company with an accrued capital gain in lieu of cash. The capital gain will not be subject to tax, and you will receive a charitable donation receipt equal to the fair market value of the securities.
When repaying debt, consider repaying personal loans before repaying investment loans. The interest on an investment loan is deductible, whereas the interest on a personal loan is not.
For Quebec residents, consider the rules that limit the deductibility of investment expenses (interest and other carrying charges) to the investment income earned in the year.
Consider prepaying any necessary eligible medical expense by December 31, 2011 so as to get the deduction in the current year.
Consider splitting QPP/CPP income with your spouse by requesting to share the QPP or CPP payments.
Rather than making an investment directly, consider loaning the funds to a lower income spouse or child and having them make the investment. To avoid the income earned being taxed in your hands, the loan should be evidenced by a written agreement with fixed terms of repayment and be subject to interest at the current prescribed rate which is 1%. Interest must be paid on an annual basis by January 30th of each year. Any income above 1% will be taxed in their hands at their lower tax rate.
Consider whether income earned by a discretionary family trust should be paid or made payable to the beneficiaries of the trust by December 31, 2011 so that the income can be taxed in the hands of the beneficiary at their lower rate of tax.
Tax-Free Savings Account Contributions (TFSA)
Since January 1, 2009, Canadian residents 18 years or older can contribute a maximum of $5,000 per year to their TFSA. In addition to the $5,000, consider making TFSA contributions to the extent you have unused contribution room from prior years. Contributions will not be deductible, but the income earned in the TFSA and any withdrawals will not be subject to tax. The full amount of any withdrawals can be put back into the TFSA in future years.
Consider giving funds to a spouse or child for them to invest in their TFSA. This can be an effective income splitting strategy.
Consider making any planned withdrawals from your TFSA prior to the end of 2011 instead of early 2012, since amounts withdrawn in a year are not added to your TFSA contribution room until the beginning of the following year.
Registered Retirement Savings Plan Contributions (RRSP)
The maximum RRSP contribution limit for 2011 is $22,450. You have until February 29, 2012 to make a contribution to your RRSP and receive a deduction in 2011. Consider maximizing your RRSP contributions to the extent you have available contribution room from other years.
Also consider making 2012 RRSP contribution at the beginning of 2012. Income will accumulate tax free in your RRSP.
For some individuals, it may be a choice between making a contribution to a TFSA or an RRSP. Your Fuller Landau advisor can assist you in analyzing which vehicle is most suitable to your situation.
Registered Education Savings Plan (RESP)
Consider setting up and contributing to an RESP for your child or grandchild. The income will accumulate tax free in the RESP and will only be taxed in the hands of the child or grandchild when it is withdrawn. Contributions made to the RESP will entitle the RESP to receive the Canada Education Savings Grant. In addition, Quebec residents will be eligible to receive the Quebec Education Savings incentive.
Registered Disability Savings Plan (RDSP)
If you or your child qualifies for the disability tax credit, consider setting up an RDSP for the disabled individual. The mere step of setting up an RDSP may make the RDSP eligible to receive Canada Disability Savings Bond (CDSB) payments Contributions to the RDSP will make the RDSP eligible for the Canada Disability Savings Grant (CDSG).
Canadian residents who are U.S. citizens should consider the U.S. tax implications before undertaking any of these strategies.
The matters highlighted in this tax memo are presented in broad general terms and, of course, cannot be applied without consideration of all circumstances. The firm will be pleased to discuss with readers the possible effects in specific situations.