A taxing time

The government fully admits it. It’s there in black and white on the Government of Canada website (canada.ca) on the History of Taxes. “In 1917, as a temporary measure to help finance the war, the federal government introduced the Income Tax War Act, covering both personal and corporate income.” It then took 31 years for them to finally admit that “…income tax was no longer considered temporary and the Income Tax War Act was replaced with the Income Tax Act.”

Taxing time

In the absence of significant push back, organizations with a comparative advantage in power (i.e. protection rackets and governments) will have a tendency to take more and more. It’s up to us to push back.

At some point, Atlas will shrug. Until then, there are many legal tax planning tools that we can and should take advantage of. For some of those tools (RRSPs for example), the deadline isn’t until 60 days after the end of the year and for others, it’s December 31st, which is very close. Tax Planning shouldn’t really be left until the end of the year. It’s something that should be considered throughout the year, but now is a good time to do a quick review and check that you’ve taken all the steps you can.

Get Vocal – get the name and email address of your local MP and/or constituency office.  Do not be shy to let him or her know how you feel about your tax burden.  MPs want to hear from you.  Why not let them?

Tax Loss Selling – consider selling investments that have gone down in value to offset capital gains triggered throughout the year. Capital losses can be carried back 3 years and carried forward indefinitely. If planning to repurchase the investments, beware of superficial loss rules that invalidate your losses if securities are repurchased in your or your spouse’s accounts within 30 days.

Donate to charity – donate before December 31 to get a tax receipt for 2019. Here in BC, (for most people) that receipt is worth 43.7% of the gift (assuming that 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.

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.

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.

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.

Registered Disability Savings Plan (RDSP) contributions – similar to 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 (either 1:1 to 3:1) and up to $1,000 in additional bond monies that, in aggregate, often result in an additional annual $4,500 in government money if the donor puts in the first $1,500 annually – so a $1,500 contribution can become $6,000 after the government contributions in many cases.  And, if you are eligible for catch up contributions, it could be even much more than that.  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, encourage them to look into it.

Review your asset allocation – year end is a good time to review your asset allocation. Has anything 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.

Rebalance – if not changing your asset allocation, consider rebalancing to your established asset allocation.  Rebalancing is one of the few “free lunches” we get as investors, as it 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.

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.

Business owners – paying taxes later is always better than paying them sooner. Consider purchasing extra inventory or other items in December to increase 2019 expenses and delay billing for a few days/weeks in order to push income into 2020, if you are able.

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 you can easily do others 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 2020 calendar year. If you are interested in having him speak to your congregation or other group regarding tithing and money matters, please contact admin@visionvest.ca or (604) 542-2818 with your preferred date and time.