Could you be paying too much tax? Here are some strategies to consider by year-end.
Plan today for lower taxes tomorrow.
Nobody likes to pay more tax than they have to. The good news is there are strategies beyond contributing to a Registered Retirement Savings Plan (RRSP) that can help reduce your taxes owing. A variety of expenses can be claimed as a tax deduction or tax credit on your tax return.
Here are eight strategies to consider before the end of the year.
1. Make a TFSA contribution before December 31
Starting in 2009, all Canadian residents age 18 years or older can contribute up to a maximum amount per year ($6,000 for 2020) to a Tax Free Savings Account (TFSA). Any unused contribution room can be carried forward indefinitely. The cumulative total since 2009 if you haven’t previously contributed is $69,500 (including 2020).
2. Withdraw from your TFSA before December 31
Withdrawals from a TFSA are not taxable, but amounts withdrawn from your TFSA are not added to your TFSA contribution room until the beginning of the calendar year following the withdrawal.
3. Make a donation by December 31
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The credit for donations is two-tiered, with a greater credit on donations over $200. Spouses can pool their donation receipts and carry forward donations for up to five years. Carrying forward donations and having them all claimed by one spouse means the $200 threshold with the lower credit applies only once.
If you donate stocks, mutual funds or segregated fund contracts directly to a charity, you will get a donation receipt for the fair market value but the tax on any capital gain will be eliminated.
4. Realize capital losses to offset capital gains
A capital loss must be deducted against any capital gain in the current year, but any excess loss can be carried back three years or carried forward indefinitely to reduce a future taxable capital gain.
If you are selling an investment at a loss, remember that the settlement date must occur in 2020 in order for that loss to be immediately available this year or one of the prior three years. As trades take two business days to settle, complete your trade by December 24, 2020, to realize the loss for the 2020 taxation year.
5. Receive at least $2,000 of eligible pension income to receive the pension income tax credit
If you are 65 or older and receive eligible pension income, you’re entitled to a federal tax credit equal to 15 per cent of the first $2,000 of pension income received, plus the provincial tax credit.
If you don’t receive pension income, you could withdraw $2,000 from a Registered Retirement Income Fund (RRIF) per year. The tax credit would also apply if you use RRSP funds to purchase an annuity paying at least $2,000 per year.
The interest income from an insurance company guaranteed interest contract (GIC), or the interest element of a non-registered annuity contract, also qualifies for the pension income credit at age 65 or older.
6. Make an RESP contribution by December 31 and receive CESG
The Canada Education Savings Grant (CESG) is available only on the first $2,500 of contributions per year per child (to a maximum of $500). The grant room accumulates until the end of the calendar year that the child turns 17 – even if he or she is not a beneficiary of a Registered Education Savings Plan (RESP). Unused basic CESG amounts for the current year are carried forward. If you have available grant room carried forward, the CESG is available on up to $5,000 in contributions per year (to a maximum of $1,000).
If RESP contributions haven’t been made, enhanced or catch-up contributions can be made to obtain the maximum lifetime CESG of $7,200 in just over seven years (i.e., $5,000 annual contributions to receive $1,000 of annual CESG). Also consider contributing by year-end when there are less than seven years until the child turns 17 and RESP contributions haven’t been maximized.
7. Make an RDSP contribution by December 31 and receive CDSG
The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are amounts paid into a Registered Disability Savings Plan (RDSP) by the government. The amount of the CDSG is based on the beneficiary’s family net income and contribution amounts, which can result in an annual maximum of $3,500 and up to $70,000 over a beneficiary’s lifetime. The amount of the CDSB is based on the beneficiary’s family net income only (not contribution amounts), which can result in up to $1,000 a year to low-income Canadians with disabilities.
The CDSG and CDSB both allow up to 10 years of unused grant and bond entitlements to be carried forward, up to an annual maximum of $10,500 for the grant and $11,000 for the bond. Due to the age limit, the end of the year in which the beneficiary turns 49 will be the last chance to claim unused grant and bond entitlements.
Research indicates that many more Canadian families qualify for the Disability Tax Credit and the Canada Disability Savings Grant/Bond than those taking advantage of these financial support systems. If you have a family member with a physical or mental disability, speak to your doctor about their health qualifications and your financial advisor about the program qualifications.
8. Turning 71 this year? Make an RRSP contribution by December 31
If you turn 71 in 2019, you must terminate your RRSP by December 31 by transferring it to a RRIF, purchasing an annuity, receiving a lump sum or a combination of these options.
You can use your spouse’s age for calculating the RRIF minimum withdrawal if your spouse is younger and you don’t wish to take as much from the RRIF as would be required for your age. However, you must elect to do this before any payments are received. Once made, this election cannot be changed. Withdrawals over the RRIF minimum are subject to withholding tax, and the attribution rules could apply for a spousal RRIF.
If you have unused RRSP contribution room, you can make a lump sum contribution before closing your RRSP. The deductions can be used in any future year, whenever they are most beneficial for you in reducing taxable earnings.
If you have no carry-forward RRSP contribution room but have earned income this year, you’ll have RRSP contribution room in 2021 but no RRSP. You could consider making next year’s contribution in December of this year, just before your required conversion date. The penalty for the overcontribution will only be one per cent for the month. On January 1, your overcontribution disappears, and you’ll get a tax deduction on next year’s tax return or whenever you choose to claim it.
With these tax-planning tips in your back pocket, and the help of your advisor, you can be on your way to a lower tax bill.
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