Year End Tax Considerations

Now that 2012 is drawing to a close, like me you are probably looking forward to enjoying the upcoming festive season.  Here are a few things that you may want to consider to insure that your financial affairs are properly structured as we enter into 2013.

Deferring a Bonus

If you are expecting a year-end bonus, your employer may agree to postpone the actual payment of the bonus to 2013.  This means that the bonus income will be taxed in the 2013 tax year.  However, by lowering the income in 2012, the amount of RRSP/DPSP/Registered Pension contribution room may also be lowered for 2013.

Charitable Donations

To be eligible for the 2012 Charitable Donation tax credit, the donation needs to be made by December 31, 2012.  When donating publicly traded securities, it is advised to donate those with implied capital gains since the donation will be for the Fair Market Value of the securities and the capital gain will be exempt from tax.  It is important to make the donation ‘in-kind’ because if the securities are sold and the cash is donated, then 50% of the capital gain realized will be taxed.

RRSPs for those Turning 71

A taxpayer cannot hold an RRSP beyond the end of the year in which they turn 71.  Therefore if you have turned or are turning 71 before the end of the year, you must do something with your RRSPs by December 31.  The two most common options are to establish a Registered Retirement Income Fund (RRIF) or to purchase an annuity. 

Home Buyers’ Plan

If you are planning to make a withdrawal from your RRSP under the Home Buyers Plan, you should consider delaying the withdrawal until 2013 if practicable.  By doing this, you will be able to defer the initial repayment of the withdrawal by one year, until 2016.

RESP Contributions

To receive the Canada Education Savings Grant (CESG) for 2012, contributions must be made to the plan by December 31, 2012.

Tax-Free Savings Accounts (TFSAs)

One of the advantages of the TFSA is that when withdrawals are made from the account, the ongoing contribution room will be increased by the amount of the withdrawal.  It is very important to note, however, that the increased contribution room does not come into effect until January 1 of the following year.  If you have therefore made withdrawals in 2012 and want to take advantage of the increased contribution room, you should wait until 2013 or you may face over-contribution penalties.

Tax Selling for Non-Registered Accounts

A popular strategy at this time of year is to sell investments that have dropped in value and trigger capital losses.  Capital losses can be used to offset capital gains.  Any capital gains realized this year can be reduced or eliminated, thereby reducing payable taxes.  If the capital losses triggered exceed this year’s capital gains, the excess amount can be taken back three years and used to reduce any capital gains realized in those years.  As an alternative, the capital losses can be carried forward to reduce capital gains in the future.

Transfers to RRSPs

A transfer of an investment to an RRSP is a deemed disposition or ‘sale’ of that investment for tax purposes.  If the deemed disposition results in a capital loss, that loss will be disallowed and cannot be used to offset capital gains. 

As an alternative, you could sell the investment, claim the capital loss, contribute the cash to your RRSP, and then purchase the investment within the plan.  The purchase however should be deferred at least 30 days to avoid a Superficial Loss.  The Superficial Loss rule prevents the taxpayer to use the capital loss if he (or his spouse) buys back the same investment within a 30 day time period.

Please don’t hesitate to contact me if you have any questions on these tax saving strategies.

Have a Great Weekend!

Tracey

Source:  Dynamic Funds