The following ideas for tax planning are valuable checkpoints to achieve your long-term financial goals and to position you in a more tax-efficient manner in the future.
- Review your investment portfolio yearly
An annual review of your investment portfolio ensures that you are on the right track to meet your financial goals. If you have unregistered accounts, the review can identify opportunities for tax loss sales. This includes reviewing the performance of your investments, identifying any investments that have depreciated and selling them to generate capital losses to offset any capital gains. Capital losses can be claimed in the current year or in any future year. You can even carry back net capital losses for up to three years.
- Donate to charity and political causes by the end of the year
If you have a passion for a community or political cause, make sure to contribute by the end of the year. Registered charities, political parties, and other “qualified gift recipients” will provide you with an official receipt that can generate a substantial tax credit. The amount of the credit depends on the amount of the donation and there are maximum limits to be observed. For specific details, go to the CRA website and search for “Charities and Donations”. Remember, you don’t have to claim the donation tax credit in the year you donate – you can carry it forward for up to five years.
- Deduct interest payments on investment loans
If you borrow to invest in assets that generate interest income, dividends, rents, or royalties, the interest on the loan can be tax deductible. This only applies to unregistered investments, not to investments in RRSPs, TFSAs and other registered accounts. Borrowing to invest can be a good strategy, but it is not without risk. You have an obligation to repay the loan even if the value of your investments goes down. Note that capital gains are not considered income for tax purposes, so interest on loans used solely to generate capital gains is generally not deductible.
- Maximize your RRSP contributions
Paying into a Registered Retirement Savings Plan (RRSP) is one of the best ways to save for your retirement and reduce your current tax burden because your contributions are tax deductible. For a given year, you can contribute to your RRSP for up to 60 days in the following year (deadline varies, but usually falls around March 1st or 2nd). Unused RRSP contribution space can be presented so that your maximum contribution in each year is this year’s limit plus your presentation amount. To view your current contribution space, log into the secure “My Account” portal on the CRA website or use the MyCRA mobile app.
- Make any required TFSA withdrawals by the end of the year
A Tax-Free Savings Account (TFSA) is an excellent way to save and invest taxes efficiently for the future while having the flexibility to make account changes if necessary. You can contribute at any time up to your maximum contribution range in a given year. And you can withdraw money tax-free at any time. Withdrawn funds can be paid back in the following calendar year. So, if you need to make a withdrawal, do so before December 31st, as the amount will be returned to your contribution space as soon as the calendar is turned over. If you wait until January to pay out, you will not be able to pay this amount again until the following year.
By carefully reviewing your previous year’s tax return with your investment advisor and accountant, you will better understand your tax situation and potentially find ways to optimize your finances. Your CRA Assessment Notice will include: Your available RRSP contribution space for the year along with information about your income, deductions, credits, and federal and provincial taxes.
Please contact me for more information and to discuss specific strategies for your particular circumstances.