2012 Year-End Tax Planning

With the arrival of December we all become aware that the year-end is quickly approaching.

Although most of us realize that paying taxes is part of life and essential to ensure that we continue with our current lifestyles, we don’t want to pay more than our fair share. We each should set aside some time to review our financial situations and take steps to reduce or defer our current tax burdens. The following should be considered:

1. Tax-Loss Selling

Review your investment accounts and determine if you are satisfied with your investment mix. If not, you may wish to consider selling investments that no longer meet your strategy and have unrealized losses. These losses can then be used to reduce any capital gains from investments that you have sold during the year, or in any of the last three years.

When planning to use this strategy, look at selling investments that you no longer wish to hold. If you plan to re-buy the stock at its currently lower price, you may not be able to claim the loss that you planned. There are “Superficial Loss” rules that state that if you, your spouse, a corporation controlled by you or your spouse or a trust of which you or your spouse are a majority beneficiary, buy back an investment within 30 days, then your loss will be denied.

2. Tax Free Savings Accounts (TFSA)

In 2009, Tax Free Savings Accounts were introduced in Canada. These accounts allow individuals who are 18 years of age or older the ability to invest $5,000 per year in a TFSA with no tax consequences (now $5,500). All investment returns earned on this account are received on a tax free basis. The funds in the account can be withdrawn at any time without any tax consequences. However, when a withdrawal is made, the amount withdrawn can only be re-contributed to the account in the following year.

This means that if you anticipate that you will need to make a withdrawal from your TFSA early in 2013, you should make the withdrawal before the end of 2012. This will allow you to re-contribute the amount withdrawn as early as possible in the 2013 year.

3. Charitable Donations

Do you have plans to make donations to your favorite charity in the near future? If you make the donation prior to December 31st, you will receive a tax credit based on the amount on your donation receipt.

If you would like to make a donation but you are short on cash, you may wish to consider donating publicly traded securities. If you have securities with large unrealized gains, you will receive a tax receipt for the fair market value of the security being donated and potentially eliminate the capital gains tax otherwise payable on the sale of the shares.

4. Registered Education Savings Plan (RESP)

With the ever increasing cost of post-secondary education, the use of Registered Education Savings Plans is becoming more important. The December 31st deadline is of importance because eligible beneficiaries can receive an annual grant of 20% of the annual contributions made to their plan to a maximum Canada Education Savings Grant (CESG) of $500 per year ($1,000 if there is unused grant room from a previous year) and a lifetime maximum of $7,200.

Additional grants may be available depending on the family’s qualifying net income.

The December 31st deadline is of even greater importance if your child or grandchild turned 15 in December 2012 and has never had contributions made to an RESP on their behalf. This will be the last chance to contribute to an RESP for this child and receive a CESG, provided a contribution of at least $2,000 is made.

5. Retirement Considerations

If you turned 71 in 2012, you must make decisions about any Registered Retirement Savings Plan (RRSP) investments that you have made over the years. Prior to December 31st, these funds must be converted into a new deferred savings plan that will start to provide you with taxable income on an annual basis; a Registered Retirement Income Fund or a Registered Annuity.

Since this is the last year that you are eligible to have a Registered Retirement Savings Plan in your name, this may be the last time you are eligible to make RRSP contributions to reduce your taxable income. If you have a spouse born after 1941, you will be able to continue to contribute to a spousal RRSP until the year they turn 71, provided you have RRSP contribution room available.

The last things that you should consider looking at each year are not related to the immediate year tax consequences but to the long term tax consequences and financial stability of your family. Take the time to review the status of the following items and ensure that they are current and appropriate for you:

  • Investment goals and risk criteria
  • Status of wills and powers of attorney
  • Succession planning for family businesses
  • Life insurance needs and policies

Taking the time to review these issues each fall will help reduce some of the concerns in your life and make your overall financial goals easier to achieve.