The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.
It is that time of the year again. The holiday season and year-end tax planning is upon us. We try to keep our opinions about the holidays to ourselves, but we do promote that tax planning is a year-round activity. Human nature prevails and many choose to make last minute decisions about both. This can lead to procrastination and inaction or hurried decisions and disappointing results. After December 31 there is very little that can be done to reduce your taxes and save money. However, here is a short list of year-end tax-planning ideas that can be implemented before the end of the year.
Make a donation to your favourite charity, but instead of giving cash you can benefit more by donating securities. Let’s assume you want to give $10,000. You don’t have the cash but you own an investment that has increased in value. By donating the investment, stocks or mutual funds for example, you will receive a donation receipt for the full amount of $10,000 and you do not pay capital gains tax on the sale of the investment. You win and the charity wins and the government has assisted in making the transaction attractive from a tax point of view.
Speak to your investment advisor about investing in a tax shelter. Certain tax shelters are sanctioned by the Canada Revenue Agency and may be eligible for deductions and credits for 2007. Others carry the risk of being declared invalid so caution must be exercised. Make sure you are comfortable with the underlying investment first. The investment is always more important then the tax savings.
For money held outside registered investments you may want to consider triggering losses or gains. If you have capital gains to report this year or reported capital gains in the three prior years, consider selling investments that have dropped in value. You can apply the loss against your gains this year or the three previous years. Losses can also be carried forward indefinitely into the future. It also makes sense to trigger capital gains if you will not suffer a tax consequence. You may be carrying forward a loss from previous years that will offset the gain in 2007.
You may want to make a withdrawal from your RRSP or RRIF before the end of the year if your 2007 income is low. You may pay little or no tax on the withdrawal. Remember the financial institution must withhold tax when you withdraw from your RRSP, but you may be eligible for most or all of the tax as a refund when you complete your 2007 tax return.
If you are self-employed you may have the opportunity to split income with family members. Review the services that family members provided in 2007 and decide if you can justify paying tax-deductible compensation in the form of salary or wages to family members before the year-end.
These few ideas only scratch the surface of tax-planning strategies. Speak to your investment advisor and tax specialist for more information. We wish everyone a save and happy holiday season and we look forward to speaking to you in 2008.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.