Time for some last-minute tax planning

The Duke of Westminster principle remains alive and well here in Canada: taxpayers still have the right to manage their affairs in order to minimize taxes payable. For some, those affairs may include RRSP contributions which have a deadline 60 days after the end of the year, but for most tools the deadline is December 31.

Tax planning shouldn’t be left until the end of the year – rather it’s something that should be managed throughout the year. However, with this hard deadline fast approaching, here are some last-minute items you should make sure you’ve taken advantage of.

1. Tax Loss Selling – consider selling investments that have gone down in value to offset capital gains triggered throughout the year.  This is a particularly good year in which to do this as many Canadian high dividend paying stocks as well as mutual funds that invest in that category have yet to fully recover, while other areas of investment are up significantly. Capital losses can be carried back three years and carried forward indefinitely.  If planning to repurchase the investments, beware of superficial loss rules that may invalidate your losses if securities are repurchased in your or your spouse’s accounts within 30 days.

2. Donate to charity – donate before December 31 to get a tax receipt for 2020.  Here in BC (for most people) that receipt is worth 43.7% of the gift (if you’ve already given at least $200 in the year).  In other words, a $1,000 gift will save you $437.

Gifting of shares that have significant appreciation is one of my personal favourite strategies (but act early as these transactions can take weeks to complete). Gifting a publicly listed security (including mutual funds) with accrued capital gains to a registered charity will provide the donor with not only a tax receipt for the gift, but also eliminates the capital gains tax for you.

3. Convert RRSPs to RRIFs or annuities if you turned 71 this year – RRSP conversions must occur by the end of the year in which you turn 71. 

4. Over-contribution to your RRSP – in some cases a one-time over-contribution to your RRSP may make sense, specifically if you turned 71 this year and had a high income.  This might be worth it, despite the one-month penalty that you would face. Talk to a specialist.

5. Registered Education Savings Plan (RESP) contributions – while you may be able to catch up on past years in some circumstances, it is better to stay caught up and maximize contributions to the plans as you are able.  Contributions are encouraged by a 20 – 40 percent matching program.  Plans can be set up by anyone but are generally created by parents and grandparents.  Make sure that you or your adviser have applied for the new BC Training and Education grant if you have an eligible child. 

6. Registered Disability Savings Plan (RDSP) contributions – like RESPs you may be able to catch up on past years in some circumstances; however, it is better to stay caught up and maximize contributions to the plans as you are able.  Contributions are encouraged by hugely generous government matching (up to 3 for 1). These are by far the most generous plans that the government has to offer, and many eligible individuals still have not taken advantage of them.  If you know someone with a disability, make sure they investigate it.

7. Review your asset allocation – year end is a good time to review your asset allocation. How did you manage emotionally in March during the market decline? Now that most markets have recovered, it may be time to review your risk tolerance. Has anything else happened in the past year that would make you want to adjust your allocation to equities? In the long run, it’s your asset allocation that will have the greatest impact by far on your return and it’s also what will determine how well you sleep at night when things go south. When done in conjunction with tax loss selling, this can be a powerful tool to maximize returns and minimize risk.

8. Rebalance – perhaps your asset allocation is exactly where it should be, but it’s been a while since you rebalanced. Consider rebalancing back to your established asset allocation. It is one of the few “free lunches” we get as investors, as rebalancing both lowers risk and increases returns at the same time. Do so in coordination with tax loss selling for the best bang for your buck. 

9. TFSA withdrawal – since withdrawals from a TFSA do not increase contribution room until the following year, December is the best month to take withdrawals, but only if you need them. 

10. COVID-19 Benefits – find out what you are eligible for and apply. Check out “Get Financial Help” at https://www2.gov.bc.ca/gov/content/safety/emergency-preparedness-response-recovery/covid-19-provincial-support as well as the business link below.

11. Business owners
    1. Paying taxes later is always better than paying them sooner. Consider purchasing extra inventory or other items in December to increase 2020 expenses and delay billing for a few days/weeks in order to push income into 2021 if you are able. 
    2. Also check into all the COVID measures for struggling small businesses and apply.  The Canada Emergency Business Account (https://ceba-cuec.ca/) is particularly generous and available to most small businesses. Assistance programs are changing rapidly. Click here for more details https://www.canada.ca/en/department-finance/economic-response-plan.html. 

As I mentioned at the start, tax planning should not all be done in the final month of the year. While the deadline may be the end of the year for much of it, tax planning should be done on a continuous basis and considering multiple years. Some of the items above are quite technical and should not be done without professional help, but others you can easily do on your own.

Also look at each of the items above and see if there are ways that you can automate them so that you aren’t scrambling at year end to get them done. Consider automatic contributions to accounts or arrange for auto rebalancing of your portfolios. See if there are things that you should consider doing earlier in the year next year, or items that you should plan out for future years. 

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Arnold is now accepting a limited number of invitations to speak for the 2021 calendar year.  If you are interested in having him speak to your congregation or other group (when services are allowed to resume) regarding tithing and money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.