Many Canadians are at risk of paying more in taxes than required this year because they are not aware of various planning techniques or they leave their tax planning too late, says CIBC’s tax and estate planning expert, Jamie Golombek.
“2011 brought numerous changes to the tax rules, heralding in both new opportunities as well as new perils to navigate through,” says Golombek.
“With 2011 drawing to a close and the holidays coming fast and furious, Canadians need to ensure they do not get so caught up with the excitement and chaos of the season that they neglect crucial year end tax planning strategies, many of which need to be implemented by December 31st to be effective.”
In his latest report, Golombek outlines the five most important tax planning strategies that advisors can share with clients over the final few weeks of the year.
1. Tax Loss Selling
If your clients have investments with accrued losses, year end is a good time to sell as it allows clients to offset any capital gains realized in your portfolio over the year. For investors to capture their losses in the 2011 tax year, the settlement must take place in 2011 meaning a trade date no later than December 23.
2. Retirement considerations
There are a number of tax considerations for those just entering or well into their retirement years. If a client turned 65 in 2011 and has not yet applied for Old Age Security benefits, you should advise the client do so as soon as possible since retroactive benefit payments are limited. In his report, Golombek identifies three additional strategies to minimize clawback which can occur with Old Age Security benefits if net income exceeds $67,668 in 2011.
“Retirees may wish to consider strategies such as delaying the conversion of their RRSP to a RRIF, reviewing the composition of their investments, or deferring the start of their CPP/QPP pension as ways to minimize Old Age Security clawbacks.”
He also reminds retirees who turned 71 in 2011 that, “you only have until December 31 to make any final contributions to your RRSP before having to convert it into a RRIF or registered annuity.”
3. Review asset allocation
Year end is also a good time to review the types of investments your clients hold and the accounts in which they hold them, as investment income is taxed differently depending upon the type of income or the type of account in which the investments are held. “Pay close attention to RRSP and TFSA contribution limits to avoid penalties on over-contributions,” advises Golombek. For clients planning a TFSA withdrawal in 2012, “consider withdrawing the funds by December 31, 2011 so you don’t have to wait until 2013 to re-contribute the amount.”
Clients who hold private company shares in their TFSA, RRSP or RRIF, will want to ensure they are not now considered “prohibited investments” subject to harsh tax penalties, as 2011 saw a change in the rules for certain investments held in registered accounts. Golombek says, “Consider taking advantage of the special transitional relief provisions available until 2021.”
4. Contribute to an RESP and RDSP
Remind your clients to make use of unused contribution room in RESPs to capture the full Canada Education Savings Grant equal to 20% of the first $2,500 per child to a $500 maximum annually.
“If you have less than 7 years before your child turns 17 and haven’t maximized your RESP contributions, consider making enhanced catch-up contributions based on the carry-forward room available with a goal to capturing the maximum lifetime Canada Education Savings Grant amount of $7,200,” recommends Golombek. If a child turned 15 in 2011 and has never been an RESP beneficiary, Golombek reminds parents that December 31, 2011 is your last chance to contribute at least $2,000 to an RESP to create CESG eligibility for 2011, 2012 and 2013.
Remind clients to take advantage of any unused room in Registered Disability Savings Plans (RDSPs) to a lifetime maximum of $200,000 or until the beneficiary turns 59. While contributions are not tax deductible, all earnings and growth accrue tax deferred. The RDSP may be eligible for Canada Disability Savings Grants or Canada Disability Savings bonds.
5. Ensure certain payments are made by December 31
Be aware that December 31 is the last day to make a charitable donation and get a tax receipt for 2011. Golombek points out that, “Many charities offer online donations with receipts generated and e-mailed immediately to you.”
He further points out that there are other expenses that must be paid by year end to claim a tax deduction or credit in 2011. These include child care expenses, medical expenses, interest on student loans or on money borrowed for investing, investment counseling fees for non-registered accounts and safety deposit box rental fees.
For self-employed or a small business owner clients, advise them to consider accelerating the purchase of new business equipment or office furniture that they were planning to purchase in 2012. “Under the ‘half-year rule’ you are permitted to deduct one half of a full year’s tax depreciation in 2011 even if you make your purchase on the last day of the year.”
More details are available in Golombek’s report, 2011 Year End Tax Tips.