Your Year-End Financial Checklist
Don’t miss opportunities to cut your tax bill come April.
Don’t leave for tomorrow what you can do today. It’s sage advice in many situations, but should it apply to your financial decisions? Yes, and no.
If you want to enjoy a brighter 2018, including cutting your tax bill next spring, think about making certain moves now, while leaving others until the calendar flips to January.
Here are six strategies to consider as year-end approaches.
1. Trigger capital losses to offset taxable gains
If you sell an investment at a loss you can use that loss to offset taxable capital gains, first for 2017, then for any of the three prior years (2016, 2015 or 2014). You may also carry forward unused capital losses indefinitely to reduce taxable gains in future years.
In September Canada and the US moved to shorten the trade settlement cycle by a day to trade-date-plus-two-business-days, or T+2. That means to book a capital loss for this year, you must act no later than before market close on December 27th for your sale to settle by year-end.
There are a couple of key points to remember when employing a tax-loss selling strategy.
First, if you’re selling foreign investments, don’t forget to calculate the impact of currency fluctuations. For example, our loonie has experienced wide swings against the greenback this year. A capital loss might wind up being larger or smaller than you expected – or even turn into a gain – once you convert everything back to Canadian funds.
Second, watch out for the superficial loss rule. It’s designed to discourage investors from selling to crystalize a tax loss, only to quickly buy back the same investment. A capital loss judged to be superficial will be denied for tax purposes. The safest way to avoid violating the rule? Wait 30 days from the time of a sale before repurchasing the investment.
Even if you don’t have capital losses to harvest, if you’re looking to sell an investment with taxable capital gains, it can be wise to do so now if you expect your tax rate to be higher in 2018. Conversely, it may be better to postpone the sale until the new year and defer the tax bill, particularly if you figure your marginal rate will fall next year. Your advisor can review your circumstances and help you make the best choices.
2. Don’t put off contributing to your RRSP or TFSA
Are you planning to make an RRSP contribution for the 2017 tax year? Don’t wait for the deadline next March, do it now. The earlier you contribute, the sooner those savings can compound tax-sheltered, bolstering your chances of building a larger nest egg over time. Going forward, consider setting up automatic weekly, bi-weekly or monthly contributions, so you pay yourself first throughout the year.
Also, consider contributing to a Spousal RRSP before year-end so that the funds can be withdrawn a year sooner without being attributed back to the higher earning spouse. If you wait until Jan 1st, you’ll have added another calendar year to the attribution rule (current year + 2 calendar years).
The benefits of contributing early and tax-sheltering go for your Tax-Free Savings Account too. The TFSA annual contribution limit remains at $5,500 for 2018. But, if you haven’t yet started a plan, you can contribute up to $52,000 this year and overall that limit rises to $57,500 for 2018.
Don’t have cash available to put into your RRSP or TFSA? You can make an in-kind contribution by transferring eligible investments. Keep in mind a transfer is considered a deemed disposition which could trigger taxable capital gains. At the same time, think twice about trying to contribute a losing investment. The tax rules will prevent you from claiming a capital loss. In that case, it’s better to sell the asset and then contribute the proceeds (don’t forget to observe the superficial loss rule before you re-establish the position).
Here’s a tip if you’re turning 71 this year and are getting ready to convert your RRSP to a RRIF or annuity by year-end. Look at making a final contribution before you convert your plan.
It’s important to point out if you’ve already maximized your RRSP contributions, adding funds will place you in an over contribution position temporarily. If that over contribution exceeds the $2,000 limit, any excess will be penalized to the tune of 1% per month. But, if you have earned income in 2017, new contribution room created January 1st will absorb the excess. And, you’ll have the opportunity to save more tax by claiming the deduction in 2018 or carrying it forward to use later.
There’s another upside to lowering your taxable earnings: there’s less chance you’ll lose income-tested benefits like OAS.
3. Postpone new investments for taxable accounts
While GICs and mutual funds* may serve different purposes in a portfolio, they have something in common: it can pay to delay putting more money into either until January. Here’s why.
By waiting until the new year to invest in a GIC, bond or other fixed income investment which pays interest annually, you’ll defer any tax owing to 2019. The same principle applies to mutual funds* which make taxable distributions of income and capital gains to unitholders before year-end. If you postpone investing in the fund until after the distribution date, you’ll avoid the tax.
4. Remember charitable donations and other tax-deductible expenses
If you’re contemplating a charitable donation to receive a tax credit for 2017, ensure you do so by December 31st. Giving cash isn’t the only way to donate. If you hold publicly-traded securities* with accrued capital gains, it can be better to gift those investments directly rather than selling them, paying tax and donating what’s left. You’ll still receive a tax credit for the market value of the property, but the capital gains won’t be taxable, leaving more for the charity.
This is the final year you can receive the First-Time Donor’s Super Credit (FDSC). You qualify as a first-time donor eligible for the credit if neither you or your spouse/common-law partner have claimed a charitable donation tax credit for any year after 2007. The FDSC adds 25% to the basic federal donations credit for monetary gifts up to $1,000.
Investment management fees, medical expenses, tuition, legal fees and child care costs are a few examples of other expenses which are deductible or eligible for a tax credit if paid by the end of the year (for a comprehensive listing of tax credits and deductions visit the Canada Revenue Agency) website.
Tax Credits and Deductions: What’s the Difference?
Tax credits and tax deductions both help you save tax, but they do it in different ways.
A tax deduction ultimately reduces the taxable income you report. Common examples are deductions for RRSP contributions, childcare expenses, capital losses and professional dues. How much you save with a deduction depends on your marginal tax rate.
A tax credit, on the other hand, is a dollar amount taken off taxes owing and is generally based on the tax rate for the lowest tax bracket. In BC, that rate for 2017 is 20.06% (15% federal plus 5.06% provincial rate). The savings from a tax credit isn’t tied to income. So regardless of tax bracket, everyone receives the same reduction, dollar for dollar. Most tax credits are non-refundable, which means you can’t claim more than what’s needed to reduce your tax owing to zero.
Let’s use an example to illustrate the difference:
Suppose you live in BC and have $85,000 of taxable income for 2017. At this level, the combined federal/provincial tax rate is 31%. So, a $5,000 tax deduction, say from making an RRSP contribution, would net tax savings of approximately $1,550 ($5,000 x 31%). What if the $5,000 were used to generate a tax credit instead? It would create savings of $1,003 ($5,000 x 20.06%) assuming both federal and provincial tax credits are available for the expense in question.
Alternatively, assume your taxable income is $120,000. At this higher amount your marginal rate is 40.7%. As a deduction, that same $5,000 produces $2,035 in tax savings ($5,000 x 40.7%), an increase of $485. Meanwhile, its value as a tax credit remains at $1,003 because it’s unaffected by income level.
A general rule? The higher your tax bracket, the more tax a deduction can save you versus a credit.
Tax planning isn’t something to leave to the last minute. Treat it as a priority year-around. Your BlueShore Financial advisor can help you make the most of all the deductions and credits you’re entitled to.
5. If you’re planning a TFSA withdrawal, do it sooner rather than later
A Tax-Free Savings Account is a terrific tool to shelter investment capital from future tax, yet the rules around making withdrawals can be tricky.
If you remove funds from your TFSA, contribution room equal to the amount withdrawn will be reinstated, but not until the following calendar year. Unfortunately, that makes it easy to accidentally over contribute by withdrawing and then re-contributing in the same year. Contributions over your limit are subject to a penalty of 1% per month.
If you’re planning to withdraw from your TFSA early next year, think about taking the money before year-end instead. That way you’ll see your contribution room replenished on January 1st, giving you the choice of replacing the funds in your plan anytime in the new year, rather than waiting until 2019.
6. Wait to take advantage of the Home Buyers’ Plan
The Home Buyers’ Plan (HBP) lets you take up to $25,000 from your RRSP tax-free to buy a first home. However, it’s really a loan you’re giving yourself. The funds must be repaid within 15 years.
Waiting until the new year to withdraw money under the program, instead of doing so in 2017, has advantages. Your repayments must begin in the second calendar year following the time you pull funds out of your RRSP. That means if you withdraw funds this year, you won’t need to repay anything until 2019. By waiting until the new year, you can postpone the first payment until 2020.
It’s a similar story for buying a home. You have until October 1st the calendar year after your RRSP withdrawal to make a purchase. Remember you have to have entered into an agreement to purchase or build a home before you can withdraw any funds through the HBP.
Set yourself up for a stronger 2018
Before your holiday season shifts into high gear, spend a little time with your finances. Taking the right steps before 2017 comes to a close can make a difference to your prosperity in 2018, and beyond.
Speak with us today to discuss your options.