Make use of these year end tax planning strategies to lower your personal income tax payable.
Tax-loss selling
In most instances, investment assets move in tandem with the specific underlying measure to which they relate - i.e. stock market would generally rise if overall economic outlook is perceived to be positive, and a spike in real estate prices can be expected if prospective homebuyers dwarf the housing supply. Assuming the stocks you own at year-end have decreased in value while your real estate assets have increased, you can lower your tax bill by taking advantage of a strategy called tax loss selling.
Tax-loss selling involves selling investments that have declined in value (i.e.stocks) at a loss, and offsetting that loss against investments which have gained in value (i.e. real estate). This strategy helps to lower the tax burden resulting from the appreciation in your aggregate investment assets. Any net capital loss that cannot be used in the current year may either be carried back three years or forward indefinitely - to offset net capital gains in those years.
In order for the loss to be available in 2019 or one of the previous three years, the settlement must take place in 2019. The settlement will be completed by December 31 if trade date is no later than December 27, 2019.
TFSA withdrawals
TFSA (Tax-Free Savings Account) allows you to put money into investments and have those savings grow tax-free throughout your lifetime. Interest, dividends and capital gains earned inside a TFSA are tax-free for life. Your TFSA savings can be withdrawn from your account at any time, with all withdrawals being tax free!
From a tax planning perspective, a withdrawal made from a TFSA is added back to your contribution room in the following year. Therefore, if you are contemplating a withdrawal from TFSA, do it before December 31, 2019.
Delay RRSP withdrawals under HBP or LLP plan
Withdrawals from RRSP prior to retirement are taxable, except if the funds are withdrawn under the home buyers’ plan (HBP) or lifelong learning plan (LLP). However, these funds need to be repaid in future annual installments, based on the year they were withdrawn.
As a means to defer repayment by one year, consider withdrawing from these plans in early 2020 rather than late 2019.
Contribute to RESP
RESP (Registered education savings plan) is a savings plan registered with the CRA and is designed to help save for your child or grandchild’s post-secondary education - up to a lifetime maximum of $50,000. The first $2,500 you put into an RESP each year is matched up to 20 percent ($500) through the Canada Education Savings Grant (CESG).
Although, unused grant money can be carried forward to future years, the maximum that can be paid out in a single year in grants is $1,000 - requiring you to contribute $5,000 for the year instead of $2,500.
Pay investment expenses
Certain investment expenses are to be paid by year end to claim a deduction or credit in 2019. This requirement applies to expenses such as interest paid on money borrowed for investing and investment counseling fees for non-registered accounts.
Tax gain donating
If you own publicly traded securities (including mutual funds) with accrued capital gains, consider gifting them to a registered charity or a foundation. Doing so not only entitles you to a tax receipt for the fair market value of donated security, but would also relieve you from capital gains tax.
All said and done, be aware that donating your appreciated securiteies should make sense from an overall investment perspective and not just with the goal of minimizing tax.
Related links:
Tax implications: Pre-retirement RRSP withdrawal
CRA’s list of charities
For professional advice, contact Alpha Accountzy, Accounting & Tax Solutions.
