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With 2011 drawing to a close and the holidays coming fast and furious, Canadians need to
ensure they do not get so caught up with the excitement and chaos of the season that they
neglect crucial year end tax planning strategies, many of which need to be implemented by
December 31st to be effective. 2011 brought numerous changes to the tax rules, heralding
in both new opportunities as well as new peril to navigate through. What follows are the
five most important strategies to focus on over the month ahead.
1. Tax-Loss SellingTax-loss selling involves selling investments with accrued losses at year end to offset capital
gains realized elsewhere in your portfolio. Any capital losses that cannot be used currently
may either be carried back three years or carried forward indefinitely to offset capital gains
in other years. Due to Canada’s strengthening dollar, securities you purchased in a foreign
currency may actually be in an accrued loss position once you take the foreign exchange
component into account.
To ensure your loss is immediately available for 2011 (or a prior year), the settlement must
take place in 2011, which means the trade date must be no later than December 23, 2011.
Superficial loss
If you plan to repurchase a security you sold at a loss, beware of the “superficial loss” rules
that apply when you sell property for a loss and buy it back within 30 days before or after
the sale date. The rules also apply if property is repurchased within 30 days and is still held
on the 30th day by your spouse (or partner), by a corporation controlled by you or your
spouse, or by a trust of which you or your spouse are a majority beneficiary (such as your
RRSP or TFSA). Under the rules, your capital loss will be denied and added to the adjusted
cost base (tax cost) of the repurchased security. That means the benefit of the capital loss
can only be obtained when the repurchased security is sold.
Transfers and swaps
While it may be tempting to transfer an investment with an accrued loss to your RRSP
or TFSA to realize the loss without actually disposing of the investment, such a loss is
specifically denied under our tax rules.
New legislation introduced this year for RRSPs and RRIFs and in 2009 for TFSAs also results
in harsh penalties for “swapping” an investment from a non-registered account to a
registered account for cash or other consideration.
To avoid these problems, consider selling the investment with the accrued loss and
contributing the cash from the sale into your RRSP or TFSA. Your RRSP or TFSA can then
buy back the investment after the 30-day superficial loss period.
2. Retirement ConsiderationsWith the first wave of baby boomers turning 65 this year, here are some tips for retirees.
Convert your RRSP to a RRIF by age 71
If you turned age 71 in 2011, you have until December 31 to make any final contributions
to your RRSP before converting it into a RRIF or registered annuity.
to your RRSP in December before conversion if you
have earned income in 2011 that will generate RRSP
contribution room for 2012. While you will pay a penalty
tax of 1% on the overcontribution (above the $2,000
permitted overcontribution limit) for December 2011,
new RRSP room will open up on January 1, 2012 so the
penalty tax will cease in January 2012. You can then
choose to deduct the overcontributed amount on your
2012 (or a future year’s) return.
This may not be necessary, however, if you have a younger
spouse or partner, since you can still use your contribution
room after 2011 to make spousal contributions until the
end of the year your spouse turns 71.
Canada Pension Plan (CPP) Retirement Benefits
If you are between the ages 60 and 64 in 2011 and are
considering taking CPP pension benefits prior to age
65, you may wish to apply by December 31, 2011. If
you start CPP benefits in 2011, your pension will be
reduced by a “downward monthly adjustment factor”
of 0.5% for each month before age 65 that you began
receiving it. Starting in 2012, however, the downward
monthly adjustment factor will increase to 0.52% (and
will gradually continue increasing to 0.6% by 2016), thus
decreasing your CPP pension. (For Quebec residents,
the Quebec Pension Plan (QPP) downward monthly
adjustment factor will increase starting in 2014.)
A quick heads up for 2012 (for non-Quebec residents):
If you work while receiving CPP retirement benefits prior
to age 65, starting next year, you will have to make
CPP contributions which will increase the CPP pension
you receive at age 65 but could cost you up to $2,300
annually ($4,600 if you are self-employed) until age 65.
Old Age Security (OAS) benefits
If you turned 65 in 2011 and have not yet applied for
OAS benefits, you should do so as soon as possible since
retroactive payment of benefits is limited. You must
meet certain residency requirements to be eligible for the
benefits and OAS payments are “clawed back” (reduced
or eliminated) if your net income exceeds $67,668 in 2011.
To minimize the clawback and maximize your OAS
benefits, consider the following strategies:
• Delay converting your RRSP to a RRIF (to a maximum
of age 71), to avoid annual RRIF minimum withdrawals
and minimize net income prior to conversion.
• Eligible Canadian dividends can accelerate OAS
clawback, since 141% of the dividend is included
in net income due to the gross-up. Consider the
composition of your non-registered investments to
reduce the clawback impact, perhaps looking to halftaxable
capital gains.
• Consider deferring the start of your CPP pension after
you reach age 65 to reduce your annual net income
and the impact of the clawback. In addition, starting
in 2012, the “upward monthly adjustment factor”
will rise to 0.64% (0.7% for 2013 and beyond) up
from 0.57% for each month after age 65 that you
begin receiving it, up to age 70.
3. Review asset allocationNon-registered Investments
Investment income can be taxed in different ways,
depending on the type of income (e.g. interest,
Canadian dividends, or capital gains), and the type of
account in which investments are held (non-registered or
registered). Year end is an excellent time to review the
types of investments that you hold and the accounts in
which you hold them.
In non-registered accounts, eligible Canadian dividends
are still taxed more favourably than interest income
due to the dividend tax credit; however, the tax rate on
eligible dividends is increasing. Looking ahead to 2012,
in all provinces except Alberta, the highest marginal tax
rate on eligible dividends will exceed the highest marginal
tax rate on capital gains. Consider whether tilting a nonregistered
portfolio towards investments that have the
potential to earn capital gains is the right move for 2012.
Registered Investments
Of course, tax on investment income can be eliminated
altogether by investing within registered accounts such
as TFSAs, RRSPs or RRIFs. While there is no time limit
for TFSA contributions and you have until the end of
February 2012 to make RRSP contributions for the 2011
tax year, you should make contributions as early as
possible to maximize tax-free growth.
Pay close attention to both your RRSP and TFSA
contribution limits, particularly since TFSA contribution
rules continued to cause confusion for many Canadians
in 2011. Many TFSA holders misunderstood the rules
and innocently withdrew funds from one TFSA and then
re-contributed to another TFSA in the same year without
having the necessary contribution room, resulting in
penalties on overcontributions. Investors who wish to
transfer funds or securities from one TFSA to another
should do so by way of a direct transfer rather than a
withdrawal and recontribution to ensure they don’t
accidentally get caught with an overcontribution
problem.
If you are planning a TFSA withdrawal in early 2012,
consider withdrawing the funds by December 31, 2011,
so you do not have to wait until 2013 to re-contribute
that amount.
Prohibited Investments
If you hold private company shares in your TFSA, RRSP
or RRIF, ensure you are aware that these could now be
considered to be “prohibited investments” and subject
to harsh tax penalties.
For example, common shares are a “prohibited
investment” for your RRSP, RRIF or TFSA if you, together
with non-arm’s length persons, own at least 10% of the
outstanding shares.
2011 saw a change in the rules for RRSP/RRIF holdings
of private company shares. Prior to the change, it was
possible to own private company shares in your RRSP/
RRIF, even if you held more than 10% of the outstanding
shares, provided you and related persons didn’t control
the company and the cost of shares was below $25,000.
With the new rules, many individuals who continue to
own private company shares in their RRSPs or RRIFs are
scrambling to get onside to avoid harsh new penalty
taxes that could now apply.
For example, any income or capital gains earned after
March 22, 2011 (the date of the original budget
announcement) from a prohibited investment in an
RRSP or RRIF is considered to be an advantage taxable
at 100%.
There are a couple of ways to avoid this harsh new tax by
taking advantage of special transitional relief provisions
available until December 31, 2021 but which require a
special election.
Under the transitional rules, the advantage tax can be
reduced from 100% to your normal marginal tax rate
on any income or gains accruing from March 23, 2011
to December 31, 2021, provided the income or gain is
withdrawn and paid to you within 90 days after the end
of the year in which the income is earned or the capital
gain is realized.
To take advantage of this transitional rate, you must file
a special election before July 2012.
You should also consider removing the prohibited
investment from your registered plan altogether which
can be done effectively by “swapping” it for cash or
other property with the same value, provided you do so
before 2022. To do this, it’s best to get an independent
valuation of the fair market value of the private company
shares you want to swap.
4. Contribute to an RESP & RDSPRegistered Education Savings Plans (RESPs)
RESPs allow for tax-efficient savings for children’s postsecondary
education. The government provides a Canada
Education Savings Grant (CESG) equal to 20% of the first
$2,500 of annual RESP contributions per child or $500
annually. While unused CESG room is carried forward to
the year the beneficiary turns 17, there are a couple of
situations in which it may be beneficial to make a 2011
RESP contribution by December 31.
Each beneficiary who has unused CESG carry-forward
room can receive up to $1,000 of CESGs annually, with
a $7,200 lifetime limit, up to and including the year in
which the beneficiary turns 17. If enhanced catch-up
contributions of $5,000 (i.e. $2,500 X 2) are made for
just over 7 years, the maximum CESG will be obtained. If
you have less than 7 years before your child turns 17 and
haven’t maximized RESP contributions, consider making
a contribution by December 31.
Also, if your child or grandchild turned 15 in 2011 and
has never been a beneficiary of an RESP, December 31 is
your last chance to contribute at least $2,000 to an RESP
in order to collect the 20% CESG for 2011 and create
CESG eligibility for 2012 and 2013.
Registered Disability Savings Plans (RDSPs)
RDSPs are tax-deferred savings plans open to Canadian
residents eligible for the Disability Tax Credit, their parents
and other eligible contributors. Up to $200,000 can be
contributed to the plan until the beneficiary turns 59,
with no annual contribution limits. While contributions
are not tax deductible, all earnings and growth accrue
tax-deferred.
Federal government assistance, up until the year the
beneficiary turns 49, may be deposited directly into
the plan in the form of matching Canada Disability
Savings Grants (CDSGs) and Canada Disability Savings
Bonds (CDSBs). The government will contribute up to a
maximum of $3,500 CDSG and $1,000 CDSB annually,
depending on the net income of the beneficiary’s
family. Eligible investors may wish to contribute to an
RDSP before December 31 to get this year’s assistance,
although this has become less of a priority now that
unused CDSG and CDSB room can be carried forward
for up to ten years.
New for 2011, RDSP holders with shortened life
expectancy can withdraw up to $10,000 annually from
their RDSPs without repaying grants and bonds. A
to make a withdrawal in 2011.
5. Ensure certain payments made by
December 31Charitable donations
December 31 is the last day to make a donation and get
a tax receipt for 2011. Keep in mind that many charities
offer online, internet donations where an electronic tax
receipt is generated and e-mailed to you instantly.
Gifting publicly-traded securities, including mutual
funds, with accrued capital gains to a registered charity
or a private foundation not only entitles you to a tax
receipt for the fair market value of the security being
donated, it eliminates capital gains tax too. Note that
changes introduced in 2011 for flow-through shares may
decrease the tax savings that were formerly available for
donation of these shares.
Other expenses
Certain expenses must be paid by year end to claim a tax
deduction or credit in 2011. This includes investmentrelated
expenses, such as interest paid on money
borrowed for investing, investment counseling fees for
non-RRSP accounts, and safety deposit box rental fees.
Other expenses that must be paid by December 31st
include child care expenses, medical expenses, interest
on student loans, and spousal support payments.
Prepayments
While expenses must be paid by December 31 to claim a
tax deduction or credit in many cases, the related good
or service does not always need to be acquired in the
same year. This provides an opportunity to prepay certain
items and claim the tax benefit currently.
A tax credit can be claimed when total medical expenses
exceed the lower of 3% of your net income or $2,052
in 2011. If your medical expenses will be less than this
minimum threshold, consider prepaying expenses that
you would otherwise pay in 2012. For example, if you
expect to pay monthly instalments for your child’s braces
in 2012, consider paying the full amount upfront in 2011
if it will raise total medical expenses over the threshold.
Prepayments can also be used for expenses that qualify
for the children’s fitness tax credit (up to $500) and the
new children’s arts credit that was introduced in 2011
(based on up to $500 of qualifying expenses for artistic,
cultural, recreational or developmental activities). For
example, if you plan to enroll your child in soccer or piano
lessons for 2012, you can claim the credit(s) in 2011 if
you pay for the activities by December 31.
Accelerate purchase of business assets
If you’re self-employed or a small business owner, you
may wish to consider accelerating the purchase of new
business equipment or office furniture that you may
been planning to purchase in 2012. Under the “half-year
rule”, you are permitted to deduct one half of a full year’s
tax depreciation (capital cost allowance) in 2011, even if
you bought it on the last day of the year. For 2012, you
can then claim a full year’s depreciation.
CONCLUSION
These five tax tips are just some of the many ways you
can act now to reap the tax savings you will realize when
you file your return next spring. But keep in mind that tax
planning is a year round affair. Be sure to speak to your
accountant or tax advisor well in advance of tax filing
season to ensure you are paying the least amount of tax
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing
Director, Tax & Estate Planning with CIBC Private Wealth
Management in Toronto.
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狗仔卡
发表于 2011-12-15 10:23 PM
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