Year End Tax Planning

As the New Year approaches, it’s time to look over your investments and see if any year-end tax planning work is required. Time is running out to implement any strategies that may help you before the Dec 31st deadline. So what strategies should you be considering?

Tax loss selling is one of the most common investment strategies that is implemented at year end. This strategy involves selling investments with accrued losses at year end to offset the capital gains realized in other areas of your portfolio. In order for this loss to be used for the 2012 tax year, you must trigger these sales before year end. If you plan to repurchase the same investment that you sold to trigger the loss, it’s important to beware of the superficial loss rules that may apply which don’t allow you to repurchase the same investment for at least 30 days.

If you plan to start taking your CPP or OAS payments next year, it may be wise to apply before the end of the year. CPP applications received before Dec 31st 2012 will have a reduced “clawback” amount for those under 65 as it bumps up in 2013. At the same time, those over 65 that are applying for CPP for the first time will be better off to wait until January to send the application in. If you turned 65 in 2012 and have not yet applied for your OAS, it’s important to note that they only pay retroactively up to 11 months so you need to get your application in immediately.

For those that turned 71 in 2012, you have until then end of the year to make any final contributions to your RRSP and have it converted over to a RRIF or other retirement vehicle. Unless you want the investment company making all the decisions for your account setup, it would be wise to act on this now.

If you have plans to pull some money out of your TFSA account and also want to re-contribute in 2013, it’s good to make this withdrawal before year end. If you wait until the New Year to make your withdrawal, you won’t regain the TFSA room until the beginning of 2014.

For those Canadians that qualify for the Disability Tax Credit but have not yet opened up an RDSP, getting this done before the end of the year will allow for 1 extra year’s worth of Canada Disability Savings Bonds (CDSBs) deposits made on behalf of the government. I strongly urge anyone who is or has a child that qualifies to look into this further right away.

For high tax bracket investors, you may want to consider a prescribed rate loan for income splitting with family members. It would often be beneficial to have some of your investment income taxed in the hands of your spouse or children but simply giving them the funds to make these investments, the income earned may be attributed back to you and taxed in your hands. To avoid this, you can actually “loan” the family member the money at a prescribed rate for as long as this loan remains in force. The government’s current prescribed rate is fixed at 1% until Dec 31st 2012 which means that the time is now to take advantage of this strategy if it’s a good fit for your situation.

There is currently a bill before parliament that would extend the charitable donation deadline until the end of February in the same fashion as RRSPs. Until that has been passed, and for this year at least, Dec 31st is the deadline to get these contributions in.

Investment tax planning is a complex process and I urge you to seek professional advice before attempting some of these strategies mentioned above. A financial professional can help you assess if the strategy you are considering is right for you and can help you properly implement it. Many of these ideas take time to put in motion so don’t wait until the last minute to contact your advisor, call them today!

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