Tax planning

By Fin MacDonald

This year I will look at tax planning for those turning 71 this year, for the self-employed and tax planning in general.

Turning 71

The year a person turns 71 is the last year that you can contribute to a Registered Retirement Savings Plan (RRSP). Before the end of the year there are three options that are open:

Take all of the RRSP into income

Transfer the RRSP to a Registered Retirement Income Fund (RIF) or

Transfer the RRSP to an Annuity.

Unless your income is very low and the amount in the RRSP is very small you wouldn't want to take it into your income. Most people will choose to transfer the RRSP into a RIF. This requires an annual withdrawl that begins @ 7.4% at age 72, increasing to 20% at age 95. When setting up a RIF it is important, if you have a spouse, to designate the spouse as the beneficiary of the RIF. Any other beneficiary (except a person with disabilities) is not entitled to a tax-free transfer and, upon your death all of the RIF will be taken into your income.

Annuities are now less of a choice with the very low returns that they generate. However, they may make sense later in retirement to lock in a guaranteed return for you or your survivor.

If you have a balance outstanding on your Life Long Learning Plan (LLP) or your Home Buyers Plan (HBP) at age 71 you have three options:

Repay the total amount to your RRSP and you will have no net amount added to your income this year or in any of the following years

Make the yearly payment and in the years remaining the required payments will be added to your income. However, you will not be able to make payments to your RRSP to offset this

Make more than the yearly payment required but not the total amount outstanding. The amount that is left will be divided by the number of years left in the Plan and added to your income each year, again with no offsetting deduction being allowed as the RRSP is now closed

Self-Employed

Contemplating a major purchase for your business? If that is the case, buying before the year end allows for the lower amount of depreciation that can be claimed in the first year to be claimed now. On your 2013 return the full amount will be able to be claimed.

Have receivables that you have not been able to collect? Now may be the time to write off your bad debts and help your own situation.

Tax Planning for All

Have you made all the Charitable donations that you wanted to? Donations of less than $200 (per family unit) attract only a 15% tax credit; those above $200 attract a 29% credit. Donations can be carried forward for upto five years.

Major medical or dental expenses such as new glasses, cataract surgery, dental or denture work, new wheelchairs or scooters for those with mobility impairments, medical travel insurance are some of the items that you may want to purchase before the year end. There is a three percent deductible on medical expenses. For example, if your income is $30,000 your deductible is $900. If what you have paid so far this year is less than the $900 deductible you may wish to consider whether to bring forward some of the expenses that you were to going to undertake next year.

How have your investments treated you this year? If you have sold stocks or mutual funds and made a profit are there dogs in your portfolio that are losers? Do you have losers that you haven't sold yet this year and had Capital Gains in the last three years that you did not have losses to put against? The last day for tax loss selling for 2012 is December 24.

The last day for RRSP contributions to be claimed on the 2012 tax return is February 28, 2013.

If you haven't made your Tax Free Savings Account contribution for this year, consider doing so. TFSAs do not provide a tax deduction but they do shelter all the income they produce going forward. If you have made your contribution or withdrawn it, make sure to wait to January 2013 before making another one to avoid those nasty penalties.

I hope you have enjoyed my tax tips. I'd like to thank the Beacon for publishing them! All the best in 2013 and let's see what we can all do To Help You Keep More of Your Money!