As we approach the end of the calendar year, it would be timely to look at some year-end tax planning strategies. Any of the strategies below, can be effective in reducing an individual’s personal tax liability.
1. Tax Loss Selling – This involves selling investments that currently have unrealized capital losses within a non-registered investment account to offset any realized gains from earlier in the year, either within the same account or elsewhere. It is important to be mindful of superficial loss rules when implementing this strategy.
2. RRSP Contributions – If you turned age 71 in 2012 you have until December 31, 2012 to make any final contributions to your RRSP before converting it to a RRIF or registered annuity. This final contribution can be a valuable tax deduction if you are in a high income bracket. You may wish to consider over-contributing to your RRSP and take the penalty tax of 1% if you have earned income for 2012. New RRSP room will open up in on January 1st, 2013 and the penalty tax will cease.
3. Old Age Security (OAS) Benefits – If you turned 65 in 2012 and have not yet applied for OAS benefits it is important to be aware that retroactive payments are limited to the prior 11 months, plus the month of application. Another important consideration here is the OAS clawback which begins if your net income exceeds $69,562 in 2012. To minimize the clawback you may wish to consider: 1) Delaying converting your RRSP to a RRIF (assuming you are younger than 71 years of age). The RRIF will provide earned income due to the minimum withdrawal provision. 2) Deferring the start of your CPP payments to reduce net annual income.
4. Tax-Free Savings Accounts (TFSA) – If you are considering a withdrawal from your TFSA it is best to do it before the end of the calendar year. Amounts you have withdrawn are not added back for contribution room until the beginning of the following year after withdrawal.
5. Charitable Donations – December 31st is the last day to make a donation and obtain a tax receipt for 2012. Gifting publicly traded securities with accrued capital gains to a charity can provide you with a tax receipt as well as eliminate any capital gains tax you otherwise would pay once the securities are sold.
6. Plan for upcoming tax rate increases in Ontario – Tax rates are expected to rise in 2013. You may wish to take advantage of this scenario by realizing some income in 2012 rather than deferring it, such as selling investments with a capital gain or exercising stock options. Delaying deductions until 2013 would be a complimentary strategy as well.
Should you require further information on the above, please contact our office. We also advise that you contact your qualified tax specialist before using any of the above mentioned strategies.