Year-End Tax Planning Checklist – Investors EditionWill
Whether you work for a company or you are a business owner, investing plays a major role in building your financial wealth. When you make an investment, your primary objective is to maximize return in order to achieve your short-term and long-term goals. Undoubtedly, tax plays a big part in determining how much profit goes into your bank account at the end of the day. You should familiarize yourself with the tax planning considerations at year-end that are listed below to maximize your return on investment.
Review asset allocation in both registered and non-registered accounts. Consider holding investments intended for capital growth in non-registered accounts to benefit from lower tax rates on capital gains and eligible dividends. You should hold interest-generating investments in registered accounts.
Consider selling investments with accrued losses before year-end sufficient to offset capital gains realized in the year. Capital losses may be carried back 3 years or carried forward indefinitely to offset capital gains in other years. In order for the loss to be available for the current year (or one of the previous 3 years), the trade date must be no later than December 23 (December 27 for stocks traded on U.S. exchanges). Due to the “superficial loss” rule, you must wait 30 days after selling a stock with a loss before you can repurchase the same stock.
Ensure that interest on investment loans and investment counseling fees for non-registered accounts is paid by December 31 to claim a deduction for the current year. Note that investment counseling fees for registered plans (e.g., RRSP, RRIF, TFSA, RESP, etc.) are not tax deductible.
If possible, delay selling investments with capital gains until the following year. The reason is because you are not required to pay tax on accrued gain until the assets are ultimately sold. This provides greater short-term cash flow as tax is deferred until the following year.
Allowable Business Investment Losses
If you own shares or debt of a small business corporation (SBC) that is in a loss position, you should consider selling the shares to an unrelated person before year-end in order to claim an allowable business investment loss (ABIL), which can be deducted against any source of income.
Lifetime Capital Gains Exemption
If you own shares of a qualified small business corporation (QSBC) for at least 24 months, consider selling the shares at fair market value to a spouse or common-law partner, a third party, or a corporation controlled by you in order to claim the lifetime capital gains exemption (LCGE) on the sale. This is one of the most lucrative tax saving strategies for investors and small business owners. However, the rules surrounding LCGE are complex and you should consult with a tax specialist on whether you qualify to for the tax exemption.
Consider deferring the purchase of mutual funds in taxable accounts to early next year or selling them before year-end to minimize the allocation of taxable income for current year, since many mutual funds distribute income and capital gains once a year, in December.
Tax-Free Savings Accounts (TFSAs)
Consider contributing to a TFSA and/or loaning or gifting funds to family members (e.g., spouse, common-law partner or adult child) to contribute to a TFSA. Contributions are not tax-deductible, but withdrawals and income earned in a TFSA are tax-free. If you need to make a withdrawal from TFSA, you should consider making it before the end of the current year instead of next year because withdrawn amounts are not added to TFSA contribution room until the beginning of next year following the withdrawal.
Prescribed Rate Loans
Consider making a prescribed-rate loan to a low-income family member (e.g., spouse, common-law partner or child) before December 31. To avoid the adverse tax consequences as a result of attribution rules, interest on the loan must be charged at the prescribed rate, which is 1%. The investment income earned on the loaned funds will be taxed in the family member’s hands as long as the accrued interest for each calendar year is paid out annually.
Review outstanding debt to ensure that interest expense is deductible to the maximum extent possible. To be deductible for tax purposes, interest expense must relate to debt incurred to earn business or investment income.
Investors who own publicly-traded shares with accrued capital gains should consider donating the shares to a registered charity or foundation since capital gains realized on gifts of publicly-traded shares are not subject to tax.
Home Buyers’ Plan (HBP) Withdrawals
If you plan on using HBP, you should consider deferring the withdrawal until after December 31 in order to extend the time period for repaying the withdrawn amounts by a year. Withdrawn amounts must be repaid to RRSPs in 15 equal instalments, starting with the second taxation year following the year of withdrawal.