A new year will soon be upon us, and that means time is running out to take action to reduce your 2014 income-tax bill and to organize your affairs so that 2015 begins on the right fiscal foot. This can involve decisions on investments, as well as ensuring payments are made before the end of the year in order to qualify for various related deductions, credits and exemptions on your 2014 income-tax return.
For most investors, the priority is to review your portfolio to identify any money-losing investments that you potentially could sell before year-end. Known as tax-loss selling, this enables you to use the resulting capital losses to offset any capital gains realized during 2014 or in any of the prior three years (in other words, from Jan. 1, 2011 onward). If you have no gains to offset during that time span, the losses can be carried forward indefinitely and applied against gains in a future year.
One-half of eligible capital losses may be used to reduce the amount of taxable capital gains -- which similarly are one-half the actual profit -- that you realized during the 2011-2014 period. For example, say earlier in 2014 you sold some shares for $20,000 for which you originally paid $12,000. Your taxable capital gain is $4,000 (one-half of $8,000). If you are in the 50% tax bracket, you'd owe the Canada Revenue Agency $2,000 in tax.
However, if you have another stock that is in a loss position -- say, shares purchased for $15,000 that now are worth just $9,000 -- you could apply one-half of that $6,000 loss, or $3,000, and reduce the taxable gain on the shares you sold at a profit to just $1,000 (the $4,000 taxable gain less the $3,000 taxable loss). By doing so, you'd lower the tax payable on the shares sold profitably this year to $500.
Alternatively, you could apply that $3,000 eligible capital loss against a gain realized in 2013, 2012 or 2011. This can be done by writing the CRA requesting that it reassess your tax return for the year in which the capital gain was reported, based on the subtraction of this year's capital loss from that year's capital gains. In this case, you would receive a refund cheque, reflecting the lower taxable capital gain.
Remember, for a gain or loss to be reported on your 2014 tax return, the related trade must be made before Christmas to ensure there is enough time for the transaction to be settled during 2014. And if you are selling a stock purely to generate a capital loss but plan on reacquiring it because you expect the price to rebound, be aware of the superficial-loss rules that require you to wait more than 30 days before repurchasing a capital investment.
If you buy back the investment within the 30-day period, the CRA will deny the capital loss and add it back to the stock's adjusted cost base. In such a case, the benefit of the capital loss would apply only when the repurchased stock is sold.
Here are some other investment actions to consider before the year-end:
- If you'll need to withdraw from a TFSA, don't delay. If you are planning to make a withdrawal from your tax-free savings account (TFSA), consider doing this now rather than in early 2015. If you delay until the new year, you will not regain the equivalent amount of TFSA contribution room until 2016. This is because amounts withdrawn from a TFSA are not added to your contribution room until the beginning of the year after the withdrawal is made.
- Be tax-wise about mutual-fund transactions. By postponing the purchase of fund units until January and/or selling units now, you will minimize the impact of capital-gains distributions made by funds to their unitholders for 2014. Check with your investment advisor or fund company as to when a particular fund will make this distribution; generally this is in mid-December. If you are redeeming a fund, you'll want to do so before this distribution date, in order to avoid the addition this payment will make to your taxable income. Similarly, you'll want to avoid being allocated income that was earned by the fund before you invested in it -- and thus delay your purchase until after the year-end distribution has been made. (Depending on your tax situation, there may be circumstances where you'd want to earn a capital gain this year, rather than in 2015.)
- Don't miss the RRSP-RRIF conversion deadline. If you turned 71 during 2014, you must collapse your registered retirement savings plan before the end of the year. For most people, that means transferring the RRSP assets to a registered retirement income fund (RRIF). You are, however, allowed to make a final contribution to your RRSP before it is collapsed, and thus claim a deduction for that contribution when you file your 2014 income-tax return.
Outside your investment portfolio, there are other important things to consider before the end of 2014. To be able to make various claims on your 2014 income-tax return, be sure to pay the following by Dec. 31, 2014:
- Investment-counsel fees
- Alimony and maintenance
- Child-care expenses (including boarding-school and camp fees)
- Tuition fees, textbook costs and interest on student loans
- Professional dues
- Charitable donations
- Medical expenses
- Political contributions
- Eligible moving expenses
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