There are just a few more sleeps until the big day. That’s right, the end of the tax year is near. Aside from donating to charity, contributing to RRSPs, and putting money in a tax-free savings account (TFSA), there’s still time to make other savvy tax moves that will help minimize the financial hit come spring.
Consider tax loss selling
Tax loss selling, or harvesting, involves selling investments with accrued losses at year end to offset capital gains realized elsewhere in your portfolio. The sale proceeds are typically reinvested.
“Any capital losses that cannot be used in the current tax year can be carried back three years or carried forward indefinitely to offset capital gains in other years,” says South Surrey, B.C., certified financial planner Bettina Schnarr of HollisWealth.
Look at prescribed-rate loans for income splitting
If you’re in a high tax bracket and have other family members who are in a lower tax bracket (such as your spouse, common-law partner, or children), it might make sense to have some investment income taxed in the hands of those lower-income family members. If you simply give funds to family members for investment, the income from the invested funds may be attributed back to you and taxed in your hands at your higher marginal tax rate, Schnarr explains.
“To avoid attribution, you can lend funds to family members provided you charge an interest rate on the loan that is at least equal to the government’s prescribed rate,” she says.
The prescribed rate is currently 2 per cent, but on Jan. 1 that will decrease to 1 per cent.
“By discussing this strategy with your accountant and making preparations before year end, you can implement a loan early in 2014 at the lower 1 per cent prescribed rate, so that you can benefit from income splitting throughout the upcoming year and for future years,” Schnarr says.
Take advantage of lower tax rates on non-eligible dividends in 2013
As a result of changes to the gross-up rate and the dividend tax credit rate on non-eligible dividends by the federal government, the marginal tax rates on these dividends will be going up in 2014. Depending on your province of residence, the top combined federal/provincial marginal tax rates for non-eligible dividends are expected to increase between 1.0 and 4.3 percentage points in 2014. In Ontario the increase will be 3.6 per cent (from 36.5 per cent to 40.1 per cent).
“Non-eligible dividends are paid from income that was taxed at low rates in a corporation, so the dividend tax credit available to individuals for these dividends is lower,” Schnarr says.
Contribute to your RRSP—even if you’re 71
If you're turning 71 this year, you are required to convert your RRSP to a Registered Retirement Income Fund (RRIF) by the end of the year.
“In many cases, you will either have RRSP contribution room available from previous years or, if you're still working, will have generated RRSP contribution room,” says Etobicoke’s Scott Plaskett, CEO of IRONSHIELD Financial Planning.
“The problem is, by the end of the year, you will lose access to your RRSP, and so making a contribution next year will not be possible. Make next year’s contribution before the end of this year even if this means over-contributing," Plaskett says.
That 2013 contribution will generate an RRSP deduction tax slip that you can carry forward to next year to apply against your taxable income then, providing you with another tax deduction you wouldn’t have otherwise.
A penalty will apply for any overcontributions, but the tax savings from the RRSP deduction may well far outweigh that penalty. Do the math first.