Act before Dec. 31 to get these tax benefits for 2017
The holiday season is fast approaching. And with the lights and festivities, investors and taxpayers will also have visions of year-end tax planning dancing in their heads. Well, maybe not, but there are certainly plenty of year-end tax-planning ideas you might want to consider that could save you big tax bucks come next April. Here’s a summary:
TFSA contribution conundrum
Dec. 31 is the key date for 2017 Tax-Free Savings Account (TFSA) contributions. If you can’t contribute to or top up your TFSA before year-end, you can carry forward the unused amount as additional “contribution room” into future years. But be careful how you handle TFSA contributions in any given year.
Most people with TFSA problems have tripped over the rules related to withdrawals and contributions in a given year.
This can happen if you start dipping into your TFSA through the year, and then making contributions in the same year. You could end up with “excess amounts” in your TFSA – that is, over and above the $5,500 annual contribution limit for the year.
The CRA levies a tax penalty of 1% per month based on the highest excess TFSA amount in your account for each month in which an excess exists. This means that the 1% tax applies for a particular month even if an excess amount was contributed and withdrawn later during the same month. The excess-amount tax kicks in on the first dollar of excess contributions. So check with your advisor to make sure you’re on-side with your TFSA contribution room before making any last-minute contributions this year.
RRSP maturity options
The rules say that you must collapse your Registered Retirement Savings Plan (RRSP) by the end of the year in which you turn 71. If you’re in this position this year, you have only a couple of weeks left to make some key decisions. There are basically three choices: You can take the entire amount into income immediately (and pay tax on it this year at your top marginal rate, which could be hefty if your RRSP is a big one); you may purchase an annuity; or you may convert your RRSP into a Registered Retirement Income Fund (RRIF), which gives you the advantage of a mandated withdrawal rate with continued tax deferral on the balance within the plan. Many people build some combination of these choices to maximize income, security, and tax efficiency.
Registered contribution deadlines
Dec. 31 is also the last day you can make eligible 2017 payments to a Registered Education Savings Plan and a Tax-Free Savings Account. But remember that Dec. 31, 2017, is a Sunday, so you’ll want to make any payments and contributions well before then to ensure they’re processed in 2017. You can make contributions to your RRSP within 60 days after year-end to be eligible for a 2017 tax deduction.
And if you’re planning a withdrawal from your RRSP or RRIF, wait until January if you can. That way, you’ll defer the tax hit for another year.
Defer RRSP/RRIF withdrawals
And if you’re planning a withdrawal from your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), wait until January if you can. Withdrawals from these plans are included in your taxable income for the year. By deferring a withdrawal until early 2015, you’ll put off the tax hit for another year.
A number of payments that you can make before year-end will give you a tax benefit for 2017. These include charitable donations (you can still do it online to ensure your donation is processed for 2017), and investment-related expenses used to earn income, like investment counselling fees and interest payments on money borrowed for investment purposes,.
While not strictly investment-related, ensure you make any necessary medical or dental payments for items not covered by provincial health plans. These include such things as glasses, prescription drugs, and hearing aids. Pay before year-end, and you can add them to your medical expense deduction for the year.
Mutual fund purchases
Avoid buying a mutual fund in December in a non-registered account. If you do, you could end up paying tax without ever having made a buck in gains. It all has to do with year-end distributions made by mutual funds.
Then, if you’re an investor, and you’ve got some losing stocks in your portfolio, you might want to consider selling before year-end.
If you’ve lost money on investment assets in your portfolio, consider selling before year-end if you wish to use losses to offset any gains you might have made earlier in the year on other investments. To qualify for a 2017 tax loss, the settlement of the transaction must take place in 2017.
Because it now takes two business days following a trade to settle a transaction, the last possible day to sell both Canadian and U.S. securities to be eligible for a capital loss for the 2017 tax year is Dec. 27 for settlement before year-end. (This year, Canadian markets are closed Dec. 25 and Dec. 26.) But check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines.
Year-end business tax tips
If you’re a business owner, consider buying computer and other equipment now rather than deferring purchases to January. Your capital cost allowance (CCA) will increase for the year, even though you’re entitled to claim only 50% of the allowable CCA (the “half-year rule”). In addition, your CCA claim for next year will be that much larger. Likewise, delay disposition of depreciable assets until January so as to avoid reducing your CCA claim for 2017.
You might also look at areas where you can bring forward deductible business expenses into 2017, for example, advertising or supplies. And on the other side of the coin, consider delaying business income due in December until January (if you have a Dec. 31 year end), thus reducing your tax bill for the current year.
The strategies I’ve outlined here won’t apply to everyone, and may be subject to other tax rules and restrictions. As always, consult with a qualified advisor when contemplating changes to your investment portfolio or when considering tax-driven business strategies.
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.