Year-end Tax Saving Tips
David Christianson, CFP, R.F.P., TEP
The good news?
There may be fertile ground awaiting you, for opportunistic year-end tax planning in 2008. You may be able to harvest the best crop of capital losses in years, and get back taxes that you paid on capital gains in 2005, 2006 and 2007.
Our teams will spend hours and hours this month exploiting this opportunity for our clients.
The bad news?
You can only take advantage if you have investments that have lost money from what you originally paid.
To reiterate my personal bias about tax planning, I feel we each have an obligation to pay our fair share, but also to arrange our affairs to pay the least amount of tax legally possible. Here are some tips to look at before December 31 to reduce your government contribution for 2008.
Sell for losses; hold for gains
Review the investments you hold outside of an RRSP or RRIF and ask your advisor for a realized capital gains report for the year to date. If you have net capital gains, then look at opportunities to sell securities that have declined in value since their initial purchase, in order to realize the capital loss and offset the current-year gains.
Confirm that the ACB (adjusted cost base) or book value shown on your statement is accurate and can be depended upon.
If you reported net capital gains in any of the last three tax years, you have an opportunity to recover the taxes you paid on those gains, by realizing overall net losses this year and carrying those losses back to the previous years. You do this by filing a T1-Adjustment form with CRA.
If you still want to own the investment, you can buy it back 31 days later.
If your children or grandchildren have “in-trust” accounts and they are earning less than $8,000 or so in total income, consider triggering capital gains on those investments. Anyone can earn up to $9,600 each year and pay no tax.
Give generously
Donations reduce your taxes by about 27% of the first $200 you donate each year, and 44% of all donations above that amount. Consider accelerating the gifts you planned to make in the first quarter of 2009 and write the cheques now, to reduce your 2008 taxes. If you are married, claim both spouses’ receipts on one tax return, so that you maximize the higher rate credit on the amounts above $200 of donations per year.
You can combine the donation and capital gains strategies by donating stocks or mutual funds on which you have large gains, directly to a charity, rather than donating cash. You will get the same 44% tax credit, but the gain is tax free if you donate the securities “in-kind” and let the non-taxable charity sell them and claim the profit.
This is especially beneficial if you have low cost-base securities, like insurance company shares you received for free under demutualization, or flow through shares that gave you a 100% tax deduction for buying them
RRSP contributions
If you turn 71 in 2008, your RRSP contribution deadline is December 31, not 60 days later, unless you are contributing for 2008 to a spousal RRSP for a spouse who is under 71. (In that case, you have until March 1, 2009.) Check your 2007 CRA Notice of Assessment or call CRA directly to see if you have any contribution room.
If you are 71 and you have earned income in 2008, you can also make a 2009 contribution of 18% of that earned income, but you will pay a 1% penalty for the month of December, as you are actually overcontributing. (You will have the contribution room in 2009, but you don’t have it yet, as it is based on the previous year’s earned income.)
Remember that if you turned 71 in 2008, you need to convert your RRSPs to RRIFs and LIRAs to LIFs prior to year end.
Take those deductions
Certain investment expenses are deductible, such as interest on loans taken out to invest in a business or an income-producing investment. Deductible fees paid to an investment counsel or investment custodian, rent on a safety deposit box, and accounting fees for calculating investment or rental income can be claimed if paid by December 31.
Business owners, self-employed or commissioned salespeople can accelerate deductible expenses by paying people or buying equipment prior to year end. On the list would be computers, software, vehicles, office supplies, maintenance and repairs, legal and accounting fees, salaries and bonuses, and business or educational travel.
Purchases of depreciable capital property, like furniture, equipment, computers, software, or automobiles will allow for a deduction of half of the full year depreciation for 2008, even if you only own the property for a few weeks. If you wait until January, you will still only be able to claim half the usual depreciation in 2009.
On the other hand, if you have the ability to legitimately defer billings or income to 2009, then do it. That can defer tax for a year.
Make sure you pay up your professional or union dues, alimony or maintenance payments (depending on the date of your separation agreement), and any 2008 moving expenses. Check the rules carefully. You might also have 2007 moving expenses carrying forward, if you exceeded the limits available last year.
Be sure to claim the recently introduced deductions and credits, like the Canada employment amount, public transit passes credit, children’s fitness tax credit and tradesperson’s tool expenses.
Consult your accounting professional or financial advisor for how these things apply to you, and about any other opportunities you may have available to you in your situation. This is also the time to start planning to pay considerably less tax in 2009, as well.
Remember, it’s your civic duty!
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This article originally appeared in the Winnipeg Free Press on Friday, November 20, 2008.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.