A new year brings a fresh start — especially when it comes to tax planning. Thus, financial advisors should consider discussing these three ideas with clients as 2018 gets underway:
1. Tax smart portfolio rebalancing
If your clients have global equities in their non-registered portfolios, chances are they fared quite well in 2017 with some financial markets hitting all-time record levels. This represents a great opportunity to rebalance a non-registered portfolio and defer the capital gains tax hit by up to 16 months.
For example, let’s say a client’s target portfolio allocation is 70% equities and 30% bonds or fixed-income. This month, you go online and see that the portfolio is actually skewed 80% toward equities and 20% toward fixed-income thanks to the success of U.S. equities. To rebalance back to the 70/30 target mix, you may wish to sell some equities and replace them with fixed-income. The good news is that if you put in your sell order in January, the taxes owing on that capital gain won’t be due until April 30, 2019.
2. Tax-gain donating
Encourage your clients to be strategic in their charitable giving in 2018 by making a budget for their annual donations. Ideally, if they’re holding significant appreciated securities in their non-registered portfolios (as in the first point above), consider donating them “in-kind” to charity. Not only will clients get a receipt equal to the fair market value of the securities donated, but they won’t pay any capital gains taxes on the accrued appreciation, saving up to 27% on taxes, depending on their province of residence.
To make things even easier, if a client prefers to give to multiple charities but would rather not deal with the process involved in transferring securities in-kind to each individual charity, consider establishing a “donor advised fund” at the beginning of the year.
This allows your client to effectively create a mini-foundation for a fraction of the cost of setting up a private foundation. The client would get the tax receipt up-front at the time of donation and can then allocate the funds to any of the more than 86,400 registered charities in Canada.
This is an easy way to make one, in-kind gift, save the capital gains taxes on the appreciation and then reallocate to the causes clients care about.
3. Maximize all registered plans
Individuals can contribute 18% of their 2017 earned income to an RRSP (less any pension adjustment) up to a maximum of $26,230 during 2018. This maximum is reached if a client’s 2017 income was $145,722 or higher.
Meanwhile, the TFSA contribution limit is stuck, once again, at $5,500 for 2018 as inflation wasn’t high enough to bring up the limit to the next $500 rounded increment. If your client has never opened up a TFSA, he or she can contribute a cumulative $57,500 immediately to his or her TFSA — provided the client was at least 18 years of age in 2009 and resident in Canada throughout those years.
If your client has children and there’s any remote chance they will head off to pursue some post-secondary education, the client should consider contributing at least $2,500 annually for each kid to his or her registered education savings plan (RESP) to get the maximum Canada Education Savings Grant (CESG) of 20%, or $500. If they’ve missed a prior year’s contribution to a child’s RESP, consider doubling up to get $1,000 of CESGs all at once.
Finally, if someone in your client’s family has a severe disability and qualifies for the disability tax credit, don’t forget the registered disability savings plan, for which just $1,500 of annual contributions can yield $3,500 of annual Canada Disability Savings Grants and $1,000 of annual Canada Disability Savings Bonds, depending on the age of the individual and his or her family income.