For many Canadians, the last day of December is a time to start celebrating the beginning of an exciting new year. However, that date also marks the deadline by which most tax-planning and saving strategies must be put into place to impact one’s tax obligations.
Fortunately, there’s ample time remaining to plan for this year. To assist you, here are some end-of-the-year tax-planning tips.
Spread Some Goodwill
December 31st is the last day to make a donation and get a tax receipt for 2011. Gifting publicly traded securities or investment funds with accrued capital gains to a registered charity not only entitles you to a tax receipt for the fair market value of the security or fund being donated, but eliminates any capital gains tax as well.
Employ a Tax-Loss Selling Strategy
Do you have non-registered investments that have gone down in value? If you sell them before the end of the year, on your tax return you can use the loss to offset capital gains on other securities realized in that year. Once current-year capital gains have been offset, the balance of the loss can be used to offset gains in the previous 3 years or carried forward indefinitely to offset future years’ capital gains. A word of caution: if you sell to claim a loss, you must wait 30 days to repurchase the same investments.
Time Your TFSA Withdrawals Appropriately
Are you planning to withdraw funds from your tax-free savings account in early 2012 (for example, to fund a winter vacation)? If so, it may be better to instead make that withdrawal before the end of 2011.
Doing so will allow you to preserve the option of replacing the funds in your plan during 2012. If you wait until January of 2012 to make the withdrawal, you won’t be eligible to replace the funds until 2013. This is because amounts withdrawn in a TFSA cannot be re-contributed until the beginning of the year following the withdrawal. Remember that TFSA over-contributions are penalized—and any income from them is fully taxed.
Maximize Your Capital Cost Allowance Claim
Thinking about purchasing new equipment for your dental office? If you do not operate your dental practice through a professional corporation, it may be wise to make these purchases before year-end.
Although you’ll only be able to claim 50% of the normally allowable capital cost allowance (CCA) on your new equipment/furnishings, you’ll still be increasing your CCA for this tax year—and setting yourself up for an increased CCA claim in the following tax year. (CCA is basically a tax term for claiming the depreciation of a business asset. Assets like equipment may be claimed as a capital expense and depreciated over a set schedule as defined by the government. Speak to your accountant for details.)
Create Pension Income
Starting at age 65, you are entitled to a tax credit for your first $2000 of pension income. If you are not receiving a pension (which is the case with most dentists), and do not intend to close your RRSP, you should consider transferring $2000 from your RRSP to a retirement income fund and immediately withdraw it. This “mini-RIF” technique could potentially save you hundreds of dollars in tax each year. Your CDSPI investment planning advisor can assist in setting up a mini-RIF for you at no cost.
Pay the Bills Before 2012
Remember to pay all of your tax-deductible expenses (which may include investment management fees, tuition fees, safety deposit box fees, accounting and legal fees, child-care expenses, alimony and medical expenses) by year-end if you intend to deduct them on your 2011 tax return.
For no-cost investment planning advice, contact a licensed investment planning advisor at CDSPI Advisory Services Inc. Dial 1-877-293-9455, extension 5023. Restrictions may apply to advisory services in certain jurisdictions.
Note: Information in this article is provided for your general guidance. Readers are advised to consult a qualified tax professional before making tax-planning decisions.