The holidays aren't the only thing that's fast approaching. So is year-end tax planning, which can greatly increase your tax savings when you file your 2011 return next year. Consider these six strategies:
Engage in some tax-loss selling
Looking to unload some losing investments? The end of the year is the perfect time to do it. Capital losses can be used against capital gains, applied first to any gains earned this year. If losses exceed gains for this year, you can apply losses against the gains for the last three years, says Frank DiPietro, director of tax and estate planning at Mackenzie Financial.
To ensure sufficient time for a trade on a stock exchange or a mutual-fund redemption to settle before year-end, the sell order should be placed no later than Dec. 23.
Di Pietro notes that some investors want to buy back the investment after triggering a loss. They just have to be mindful of the superficial-loss rule, which means not buying back the identical investment within 30 days before and after the initial sale.
Still, there are some ways around the rule, notes DiPietro. Investments could be transferred to your child, for instance, which allows you to trigger the capital loss and keep the investment within the family. This same strategy, however, does not work with a spouse since that also would be affected by the superficial-loss rule.
Here's another strategy. If you own a mutual fund in a trust version, for example, you can switch to a similar investment in a corporate-class version. "You might get exposure to the same investment but for tax purposes, those are not considered to be identical properties, so you won't be affected by the superficial-loss rules," DiPietro says. "It's a neat way to keep your investment but trigger a loss."
You're 71? Make a final RRSP deduction
People who turned 71 this year must convert their RRSP to a registered retirement income fund (RRIF) or annuity. But they should still make one last RRSP contribution in December before the end of the year to get a tax deduction. DiPietro suggests they also look at over-contributing to their RRSP by year-end if they expect to have earned income next year. "They'll be able to use that RRSP deduction on their tax return even though they no longer have an RRSP," he says. "They'll have a 1% penalty for over-contributing for one month but the tax savings will likely outweigh that penalty." He recommends seniors in this situation discuss this strategy with their financial advisor or accountant.
Catch up on RESP contributions
Maximize your Canada education savings grants by contributing to your registered education savings plan. The most CESG you'll get for one child is $7,200, but you won't receive it all at once. Over the course of one year, the maximum amount the federal government will pay is $500 in CESG for a $2,500 contribution -- and an additional $500 on another $2,500 if you have carry-forward contribution room, says DiPietro. If you haven't contributed to RESPs and your child is over age 10, now is the time to get cracking to ensure you'll get as much of the grants as possible.
When the child is 16 or 17, they are eligible for some CESG only if at least $2,000 was contributed to their RESP by the time the child was 15. So if you have a 15-year-old and have yet to make a contribution, you'll want to contribute at least $2,000 to their RESP by the end of the year. That ensures not only that they get the grant for this year but qualify for grants next year and the year after, which would be the final year for grant eligibility.
Withdraw from your TFSA now
Planning on withdrawing some money from your tax-free savings account in the near future? If you can, it's best to withdraw by Dec. 31 instead of early next year, says DiPietro. Withdraw it now and you can put the money back as early as January, since any TFSA withdrawals will add contribution room in the next calendar year. Wait until January or later to withdraw and you may have to wait until the January 2013 to re-contribute that money, he says.
Make charitable donations
You have until Dec. 31 to make charitable donations and receive a tax receipt that can be applied to the 2011 tax return. You can also donate publicly traded securities to charity and be exempt from paying any capital-gains taxes as a result.
Be aware of changes to Canada Pension Plan
Under the current rules, once you start collecting CPP, you no longer pay its premiums. But starting in January, if you are collecting Canada pension and still working, you'll have to start paying into CPP again. If you're older than 65, you have a choice of whether to pay or not, but the onus is on you to opt out or the government will collect the premiums. DiPietro recommends affected seniors go to Human Resources and Skills Development Canada (HRDSC) and fill out form CPT30 to opt out by Dec. 31. Those who do so won't have CPP premiums coming off their paycheques starting in the new year.
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