Six year-end tax-saving strategies

According to a BMO Nesbitt Burns study, many Canadians remain unsure about how taxes affect their investments. More than three-quarters of Canadians do not take tax implications into consideration each time they make an investment decision, and almost 40% are not confident they are taking advantage of all tax incentives available to them.

John Waters, vice president & head of tax, estate and trust expertise at BMO Nesbitt Burns, advises investors to seek out the assistance of a financial and tax professional. He cautions that waiting until the New Year to start thinking about taxes is often too late, as many of the cut-off dates that can lower taxes fall at the end of the calendar year.

“Although tax planning should be a year-round affair since many tax strategies require foresight to be effective, there are still opportunities to reduce your 2011 tax bill — particularly if you act before the end of the calendar year,” says Waters.

He suggests considering the following six year-end tax-saving strategies for clients (December 31 falls on a Saturday this year, so plan accordingly):

1. Payment of quarterly tax installments – Deadline: December 15
Clients whose estimated income tax payable for the year, or payable for either of the two preceding years, exceeds $3,000 ($1,800 for Quebec residents) may be required to pay income tax installments. Personal tax installments are due four times a year, with the final installment due December 15.

Canadian investors are often required to make installments since tax is not deducted at source on investment income; if an investor falls short on any required installments, he or she could incur non-deductible interest or penalties.

2. Tax-loss selling – Deadline: December 23

Clients who have investments that have depreciated in value should consider selling these investments before year-end to offset capital gains realized earlier in the year to reduce your overall tax bill. It is important to ensure that a sale makes sense from an investment perspective, since stocks sold at a loss cannot be repurchased until at least 30 days after sale to be effective.

3. Charitable Donations & Other Tax Credits/Deductions– Deadline: December 31
Instead of donating cash to charities, investors should consider donating appreciated publicly-traded securities. This strategy can provide a tax credit equal to the value of the securities donated, while also potentially eliminating the capital gains tax otherwise payable on the gain accrued on the security. Ensure all charitable donations are made before December 31, in order to receive a tax receipt for 2011.

December 31 is also the final payment date for a 2011 tax deduction or credit for expenses such as childcare, medical, tuition and the recently-introduced children’s fitness and arts tax credits.

4. Dividend Income – Deadline: December 31
Personal tax rates on eligible dividends were increased in 2010 and 2011, with a further rate increase coming in 2012. In light of these recent changes, review portfolios with clients to determine if any changes to their investment mix are warranted.

5. TFSA Withdrawals – Deadline: December 31
Clients planning a withdrawal from a Tax-Free Savings Account should consider making this withdrawal in December instead of waiting until the new year; a withdrawal would result in additional TFSA contribution room in the following year.

6. RRSP Contributions for those turning 71 – Deadline: December 31
Individuals who turned 71 years of age in 2011 must collapse their RRSP by the end of the year. Such individuals should consider a final RRSP contribution, assuming any unused contribution room exists. Seniors and/or retirees should also take note of some of the important tax changes in recent years (such as pension income splitting, the amendments to the Canada Pension Plan and the introduction of the TFSA) that may impact their tax planning.