Your investment portfolio can benefit from a number of year-end tax strategies if you take action soon enough.
Many tax-saving initiatives take time to implement, particularly if you need to talk to an accountant, and year-end is fast approaching.
If you are turning 69 in 2005, 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.
If you must set up a RRIF in 2005 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 2006. So you will have to pay an over-contribution penalty for a short period, but this likely will be small compared with the income tax refund you will receive.
Also, if you are passed the age of 69, contributing to a spousal RRSP (which must be done before year-end for spouses who turn 69 this year) is another way to defer taxes.
If you want to build an education fund for children or grandchildren, you need to make a Registered Educational Savings Plan 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 2005.
If you are just setting up a RESP, keep in mind that you will need a social insurance number for the child to get the grant and this could take several weeks to obtain.
Another tax-saving opportunity is to donate stock instead of cash to a charity. Normally, you would pay income tax on half of a capital gain, but if you donate stock, only a quarter of the gain is taxed. This takes set-up time with the charity, so don’t expect to do this after mid-December.
If you will have cash left over after you maximize your RRSP contribution for 2005, you should consider investing in a resource tax shelter. There are several offered by reputable investment firms that will allow you to deduct your full investment amount against other 2005 income and thereby achieve substantial tax savings.
If, for example, 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.
You should skip other, less-accepted types of tax shelters since these are a lot trickier and risk being disallowed by the tax authorities, who have recently attacked art-donation schemes.
Other tax-deferring strategies include waiting until 2006 to sell any assets that would yield taxable capital gains and avoiding mutual fund investments in your non-registered account prior to year-end. Unfortunately, Canadian tax rules provide that all capital gains incurred within a mutual fund during 2005 will be attributed to those holding the mutual fund units at year-end.
Now is also a good time to book losses on stocks and other securities held in non-registered accounts. The sooner you do this the better since your loser stocks could get beaten down further by last-minute tax-loss sellers closer to the last day (Dec. 23) it needs to be done for the loss to apply in 2005. Tax rules allow this year’s losses to offset capital gains incurred in 2005, to 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 – or to be carried forward indefinitely. Investors should keep in mind that to get the tax loss, they can’t buy the same security again, either in their non-registered or registered accounts, until 31 days after the sale.
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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©2005 Wayne Cheveldayoff