2013 Year End Tax Planning

By Fin MacDonald, Fin Tax Service

With December upon us it is time to make sure that what should be done, needs to be done, or can be done to save taxes is done this month. I'm going to look at options available to people in different stages of life and different financial situations. As always, I take this through my lens of Helping You Keep More of YOUR Money!

I recently attended a very interesting afternoon at Silver City, sponsored by McCall Bros Funeral Home. Kevin Holte, of The Grateful Executor, gave a talk on the financial side of end-of-life issues. (This was followed by a screening of The Last Vegas.) I could tell by the audience - most of whom were seniors - reaction that most of the issues he raised needed more attention. A few of his 'nuggets':

Keep your will up to date

Think long about who will be your Executor

Make a list of where all your documents are

Consider gifting things to your children while you are still alive.

Be wary of going to joint ownership of your principal residence with your children.

A comment on his last point: transferring ownership of part of your principal residence may cause more tax to be payable on it when you pass away. Seek advice before making such a move.

Turning 71

In my column last December I looked at the implications of turning 71 on RRSPs, just a brief review. The year a person turns 71 the RRSP must be either taken into income or transferred to a RIF(Registered Income Fund) or annuity. For most people, transferring the RRSP to a RIF makes the most sense. It is important to name a beneficiary for your RIF.

If there are outstanding amounts left on money borrowed from the RRSP for the Life Long Learning Plan or the Home Buyers Plan, a decision needs to be made on which option to pursue. One can either repay the balance (which is then transferred to the RIF) or make the required payment this year; the balance will be added to your income each year until it is repaid.

Income Splitting

Since 2007 Pension Splitting has been available to those with qualified pension income.This doesn't include CPP or OAS. During the last federal election the Harper government promised to bring in income splitting for those families with children under 18, at a cost of $2.5 billion per year. This would come into effect when the federal budget is balanced. This now appears to be likely in 2015 (just in time for the next election!).

Another way for income splitting is for the spouse with the higher income to loan the other spouse money to invest. The income from the investments is then taxed in the hands of the lower-income spouse. For this to work, the interest on the loan MUST be paid each year. Until the 4^th quarter of this year, the Prescribed Interest Rate (set by the Canada Revenue Agency) was 1%. As of October 1, 2013 this was increased to 2%. What this means is that, on a loan of $100,000, the spouse borrowing the money would now have to pay the spouse who loaned the money $1,250. The loaning spouse would have to report this income, and the borrowing spouse would be able to deduct the interest as a carrying charge. If the Prescribed Interest Rate stays at 2% for all of 2014, the amount payable on the loan would be $2,000.

Investors

The last day to sell or buy stocks and mutual funds to have them clear this year is December 24. The TSE has risen substantially this year. You might want to take your profits now, especially if you have capital losses of other years or have losses in other issues this year (BlackBerry anyone?)

If you are going to re-acquire what you have sold, remember to wait at least 30 days or the CRA will not consider the sale to have been made.

Self-Employed

December is an excellent time to make capital purchases that you have been contemplating. For example, if you have a landscaping business and need a new truck, buying it before year end allows you to claim the depreciation for the whole year. Since the rate of depreciation allowed in the year of purchase is only half of what is allowed in subsequent years, buying now save taxes this year and more next year than if you had waited until January.

December is also a good time to look at your accounts receivable. Are some of these beyond hope of collection? It may be time to take the write-off for them.

Medical Expenses

Will your medical expenses this year exceed the 3% of your net income? If they will, maybe it's time to get some of the optional dental work done this month. New glasses, a new walker or other necessities can increase your medical claim.

Charitable Donations

Planning on giving to a favourite charity? Taking advantage of the first time donation 'super credit'? By doing it this month you can lower your tax bill come April.

RRSP Contributions

The deadline for RRSP contributions to be claimable on your 2013 tax return is Friday February 28, 2014.

TFSA Contributions

As of this year the total Tax Free Savings Account contribution room is $25,500. If you have not made a contribution, consider it. All earnings inside a TFSA are tax free, and there is no tax payable on withdrawls.

I enjoy helping you, dear readers, to better understand our Income Tax System. Using my lens of Helping You to Keep More of YOUR Money, I hope you have found these articles useful.

In the February issue of the Beacon I'll look at getting ready to file your 2013 tax return.