The days are counting down to the end of 2016, and amid all the seasonal festivities there may be some extra work to be done. We're not talking about party planning or finally tackling postponed tasks at work. It's to do with your personal tax situation and what you might be able to do before 2016 becomes history -- and along with it your income and expenses for the year.
By reviewing your financial situation in terms of investments as well as personal circumstances, you may be able to trim your income tax bill for 2016, as well as restructure your affairs so as to pay less tax next year and beyond. The following are some key strategies to consider, depending on your personal tax situation, as gleaned from reports on year-end tax planning by KPMG and BDO Canada.
Sell by Dec. 23 to realize capital losses. If you own stocks, mutual funds or other capital investments that have lost money since you acquired them, selling them now will enable you to use the resulting capital loss to reduce gains from other investments sold this year, or during the previous three years. Transactions must be completed by Dec. 23 to ensure the settlement date occurs before the end of the year. If you wish to repurchase these securities, you must wait at least 30 days to avoid triggering a superficial loss (which would disallow that loss from being applied against gains).
Rebalance any holdings in corporate-class mutual funds. As of Jan 1, 2017, you no longer will be able to transfer between a mutual-fund corporation's various classes without triggering a capital gain or loss. As of 2017, this taxable event must be reported on your tax return.
Manage your income to increase RRSP room. Your maximum annual RRSP contribution is based on your earned income during the previous year. For the 2017 taxation year, the limit will be $26,010, limited to 18% of your earned income. This means you would need $144,500 of earned income to make the maximum dollar contribution for 2017. If you have some control as to when you receive employment or business income in 2016, such as taking it as salary instead of a dividend, consider making this arrangement before the year-end.
Make your RRSP withdrawals tax-efficient. If your 2016 income is lower than what it has been in past years -- and you expect it to increase next year and beyond -- it may be worthwhile to withdraw some funds from your RRSP and pay tax at your lower rate that will apply this year. However, by doing so, those savings would no longer benefit from the RRSP's tax deferral. And bear in mind that you cannot replace funds withdrawn from an RRSP. You can of course continue to put in new money, according to your contribution room.
Delay making a withdrawal from an RRSP through the Home Buyer's Plan. This will give you an extra year to repay the amount. If you took out the money now, 2016 would count as the first year. HBP repayments must begin on the second year after the year you withdrew the money from your RRSP.
Avoid penalties on ineligible RSP holdings. In some cases, shares of privately held companies might not be eligible to be held within an RRSP. If these shares or another "unqualified" investment were added to your plan this year, and if you transfer them out before the year-end, you should be able to escape the 50% penalty tax. Such shares and a number of other investment types were deemed to be unqualified under restrictions that took effect in March 2011. While the fair market value of such investments held in an RRSP on that date can continue to be held within a plan, any income earned on them since that date may be subject to the penalty tax.
Observe the conversion deadline for RRSPs. If you turned 71 this year and if you haven't already done so, you must convert your RRSP to a registered retirement income fund (RRIF) or an annuity by the end of the year. Prior to this, if you can afford to do so, contribute the maximum to your RRSP for 2016, including any unused contribution room.
Consider overcontributing to your RRSP before collapsing it. This excess amount for people who turn 71 this year should be the amount of your maximum contribution for 2017, plus the $2,000 overcontribution balance that is allowed, without penalty, at any given time during the life of your RRSP.
Hold off on replenishing your TFSA. You can contribute a maximum of $5,500 to a tax-free savings account for 2016, and unused TFSA contributions may be carried forward for use in future years. However, if you withdrew from your account this year, you must wait until next year to put the money back in to avoid paying a penalty.
In addition to investment-related actions, there are a number of family and personal issues to address before the end of the year. Among these are:
Children's fitness and art credits. This is the final year in which you can claim these credits. The fitness credit provides a refund of up to $500 of children's qualifying fitness-related expenses. The arts credit covers up to $250 or eligible costs, but is non-refundable (meaning you must have taxable income in order to claim it). If you don't have enough expenses to make full use of these credits, find out if you can prepay some costs for 2017 and claim them while these credits still exist.
Moving to a new province. If you are moving to a province with a lower income-tax rate, establish your residence there before year-end. Conversely, if you are moving to a higher-tax jurisdiction, delay your move until the new year.
Other amounts to pay by Dec. 31 to be able to claim credits or deductions for 2016 include:
- Charitable donations
- Political contributions
- Medical expenses
- Support payments
- Professional/union dues
