What should I be focused on for year-end tax planning?
With the end of the year fast approaching, Canadian taxpayers will want to consider all the tax planning opportunities available to them. Which year-end planning strategies apply to you will depend upon your specific circumstances and objectives. The IG Wealth Management Year-end Tax Planning Checklist can help you understand what opportunities are most suited to you.
While you can make an RRSP contribution in the first 60 days of 2021 that can be used as a deduction on your 2020 tax return, most tax-related strategies must be implemented by December 31, 2020. Overall, the key to effective planning is being well-prepared. In this article, we’ll discuss key opportunities and strategies to consider.
Investment Planning Opportunities
Whether you have non-registered investments, registered investments or both, remember to review these accounts before the end of the year.
If you have non-registered investments with unrealized capital losses, you may want to consider triggering these losses to offset capital gains from the current year, or net capital gains in any of the three prior taxation years. This is referred to as "tax loss selling”. Capital losses can be applied against net capital gains realized this year. If those capital losses exceed any capital gains recognized this year, they can be carried back to offset net capital gains realized in any of the three previous years (or forward indefinitely).
If tax loss selling is something you are considering, it’s important to be aware of a complicated set of tax rules that can potentially deny those capital losses. These rules are called the “superficial loss rules.” You can find more information on the superficial loss rules and tax loss selling here. Lastly, if you are considering this approach, we also encourage you to speak with your accountant to ensure any losses you trigger can be claimed as intended.
If you are considering selling a non-registered investment that has an unrealized capital gain, you could delay the sale of the investment until the new year to defer the taxes on the capital gain one year. Although this may be beneficial from a tax perspective, you also need to consider your investment objectives in considering this option.
From a registered account perspective, the considerations will vary based on the type of account and your specific situation. Our Year-end Tax Planning Checklist highlights the issues that arise at the end of the year with each type of account. Examples include:
- If you are considering making a TFSA withdrawal, a withdrawal before the end of 2020 would create additional TFSA contribution room in 2021 while a TFSA withdrawal in 2021 would not create additional TFSA contribution room until 2022. If you are planning a TFSA withdrawal in early 2021, consider whether it could be withdrawn before the end of 2020 instead.
- Do you have a child that turned 15 in 2020 and have not yet opened a Registered Education Savings Plan (RESP)? Making an RESP contribution of $2,000 before December 31, 2020 would not only allow you to receive the Canada Education Savings Grant for this year, but also for an additional two years on contributions of up to $5,000 per year.
Income Splitting Opportunities
Income splitting can be one of the most effective ways to save tax for your family, now and in the future. Some examples include:
- If you are saving for retirement, a spousal RRSP contribution will provide a tax deduction for you now and the future retirement income is taxed in the hands of your spouse (assuming the spousal RRSP attribution rules are not triggered).
- Certain income splitting strategies can be implemented with adult children and/or your spouse, such as gifting money to a spouse or adult child to make contributions to their TFSA account.
- Another consideration is loaning funds at the prescribed rate to your spouse or adult child, directly or indirectly through a family trust, to invest in non-registered funds. The prescribed rate loan strategy may be particularly attractive now as the current prescribed rate is only 1%.
There are many other strategies that could be suitable for you. Here are a few other areas that you may want to explore further with your IG Wealth Management Consultant:
- Charitable giving
- Maximizing your tax credits and deductions
- Planning for disabled individuals
- CPP & OAS issues
It’s important to plan ahead
Taking the time to review your tax situation before the end of the year can result in significant savings. For more information on this topic, please speak to your Financial Planner.
Published as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant. Trademarks, including IG Private Wealth Management, are owned by IGM Financial Inc. and licensed to its subsidiary corporations