Year-End Tax Planning Tips
Posted 21 Nov 2017 by Rick Irwin, CFP, CLU
As another year draws to a close, and given all the hustle and bustle of this time of year where certain things can get overlooked, I thought it was important to share with you some year-end financial and tax planning tips might be useful to put in place before ringing in the New Year.
Registered Education Savings Plan Contributions
Make sure you make any contributions to a child’s RESP before December 31st to have the contributions receive this year’s grant. The maximum contribution to optimize the 20% government Canada Education Savings Grant is $2500 per year if you have put the maximum in every year. If you have missed a year(s) in the past you can double up and put in $5000 and receive the grants on the full amount. Note: the calendar year that the child turns 17 is the last year that RESP contributions can receive the CESG so if you have a child/grandchild that is of that age you might consider that one final top up.
Registered Disability Savings Plan Contributions: If you are eligible for this form of plan, consider making a contribution before the end of the year to receive the very generous government grants that are associated with this plan. (As much as $3500 for $1500 invested for more modest income individuals.) There is also a three year catch up provision here where you can invest $4500 for the current year, and two years prior if you were eligible and missed making contributions, and you could receive up to $10,500. With these generous incentives it doesn’t take long for these plans to grow.
Charitable donations: If you plan to give to charity this year, make sure you do so by December 31st to receive a charitable receipt for 2017. If you have Non-Registered investments that have gone up in value consider gifting those in kind to a charity, or using them to set up a private charitable foundation, as that way you get a double tax benefit: eliminating the capital gain on the investments being transferred as well as receiving a charitable credit for the full value gifted.
Capital loss harvesting: it’s generally been a pretty good year for financial markets but if you do have any investments that are down in value, and if it makes good sense to sell them investment-wise, it’s a good idea to trigger the losses so that the trade settles before year end in order to claim the loss against gains incurred this year. (Or to carry it back to gains incurred in the last two years). The last date to place a trade to settle in 2017 is Wednesday December 27th.
Cash Wedge planning: if you are currently drawing retirement income and strategically draw that income from a cash/low risk vehicle inside your investment portfolio, it’s a good annual exercise to harvest profits from other areas and fill up the 1 and 2 year “Cash wedge” buckets to perpetuate income for the next few years. Given strong gains in some areas, like technology, this year there could be opportunities to do prudent profit taking here as well.
Consider tax bracket management: Look to see if you have room, or will have room via pension income splitting, to take additional income into your hands from investments (either RSP/RRIF withdrawals or by triggering capital gains) without pushing yourself into a higher tax bracket. If you do, consider doing so before year end, especially if that would be a dollar that you would likely have had to take into income at a higher rate in a future year. (When the government forces a set amount be withdrawn from Registered plans, for example, or in the event of an early death of one spouse etc). Even if you don’t need to spend the money consider reinvesting it inside a TFSA for tax free growth. Note: it may make more sense to trigger capital gains than redeem from a RSP in the event that the government increases the inclusion rate at which capital gains are taxed in the future.
Transferring company matched shares: if you participate in an employee share purchase plan, and you are able to divest a sum of these shares annually, it might be a good time to look at doing so. This will diversify your holdings and ensure that you not be too over-exposed to the company you work for. If considering this, you should seek investment advice on this from someone licensed to advise on stocks. Note: this might not necessarily be a year-end activity but might be tied in to your employment anniversary date.
Year-end bonuses: if you have an employer that pays a year-end bonus, rather than have this be put through payroll and lose as much as half of it to tax, consider having this amount transferred tax free to your RSP if you have room available.
Small business owners: if you are incorporated and have the ability to pay dividends to other family members that are in lower tax brackets than you (such as a spouse or college age adult children), consider paying dividends to them before year end. NOTE: Under the Liberal’s proposed tax changes, this will likely be the last year that this strategy will be feasible to a non-owner spouse and adult children; so this is something to strongly consider doing this year!
Not all of these tips may be relevant to your personal financial situation and it is always recommended that you consult with a tax and/or investment professional before endeavoring to do any of the above strategies. If you have any questions about any of the above but please do not hesitate to contact us. Happy year end planning and all the best for a financially fit 2018!