There are several important tax-saving initiatives that must be carried out before December 31 in order to get the benefit for the 2004 tax year.
Here are eight in the investment area that you should consider as soon as possible since it may take some planning and possibly a visit to a tax accountant to get everything done right by year-end.
1. Donate stock instead of cash to a charity to get a special tax break. Normally, half of a capital gain is taxed as income, but for any capital gain triggered by a donation of stock, only a quarter is taxed as income.
2. If you are turning 69 in 2004, you have to convert your RRSP into a RRIF by year-end. When setting up the RRIF, you can base the withdrawal schedule on a younger spouse’s age, thereby minimizing the withdrawals and the taxable income they generate in future years.
3. If you must set up a RRIF in 2004 and if you also have employment income, you can still make a RRSP contribution and get a tax refund next April. The contribution has to be made before your RRSP ceases to exist at year-end and it is technically tricky to do, since you are not supposed to make RRSP contributions on this year’s employment income until 2005. So you will have to pay an over-contribution penalty for a short period, but this likely will be small compared to the income tax refund you will receive.
4. Make a RESP contribution before year-end to get the Canada Education Savings Grant (maximum of $400 or 20 per cent of your contribution up to $2,000) for 2004. If you are just setting up a RESP, keep in mind that you will need a social insurance number for your child to get the grant and this could take several weeks to obtain.
5. Invest in a tax shelter. There are several resource tax shelters offered by reputable investment firms that will allow you to deduct your full investment amount against other 2004 income. If you have a 46-per-cent marginal tax rate, a $10,000 investment would cost only $5,400 after tax, although the investment would be tied up for a couple of years until the tax shelter is converted into mutual fund units. With resource stocks in a boom, these tax shelters have performed quite well in recent years. They have been around for decades and have the sanction of government because they encourage resource exploration. There are other tax shelters related to films or art donations but these are a lot trickier and should be avoided by all except those with very high risk tolerance and deep pockets to pay lawyers in case the tax authorities jump all over them as they have recently with art donation schemes.
6. Book losses on stocks and other securities held outside registered plans like RRSPs, RESPs, and RRIFs. The sooner you do this the better since your loser stocks could get beaten down further by last-minute tax-loss sellers close to the last day (Dec. 24) it needs to be done for the loss to apply in 2004. Tax rules allow this year’s losses to offset capital gains incurred in 2004. Even if you don’t have capital gains this year, the losses can be carried back and applied against any capital gains in the preceding three years – thereby generating a nice refund from capital gains taxes paid for those years. Finally, any losses left over can be carried forward indefinitely. Investors should keep in mind that to get the tax loss, they cannot buy the same security again, either in their non-registered or registered accounts until 31 days after the sale.
7. Defer sale of any assets that would yield capital gains until 2005. That way, you will not have to pay income tax on the gains until 2006.
8. Avoid investment in mutual funds in your non-registered account prior to year-end. Unfortunately, Canadian tax rules provide that all capital gains taken within a mutual fund during 2004 will be attributed to those holding the mutual fund units at year-end. Of course, this doesn’t apply in a registered account like an RRSP, RESP or RRIF.
Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.
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©2004 Wayne Cheveldayoff