Year-End Tax Planning: Plans For Canadians

As we close the end of the fiscal year, we wanted to highlight seven strategies that may help you reduce your 2021 tax liability related to your investment portfolio. Because some of these strategies are complex, you should seek the advice of a financial advisor or a tax planning specialist before embarking on them.

Have you made the most of your TFSA contribution this year?

While the contribution limit for a Tax-Free Savings Account (TFSA) is $6,000 in 2021, you may have unused contribution room if you haven’t maximized your contributions in previous years. If you are over the age of 18 and a Canadian resident since the TFSA’s inception in 2009, you can contribute up to $75,500 for the first time. If you have TFSA space, you should talk to your advisor about moving some of your investments from an open, non-registered (tax-exposed) account to a TFSA. Your advisor can assist you in weighing the benefits and drawbacks of triggering a potential capital gain versus shielding all future income from taxation. They can also help you with any transferred investments with an accrued capital loss. 

 

CRA would deny a capital loss claim resulting from a deemed disposition via transfer to a TFSA. When deciding between an RRSP and a TFSA, it’s critical to weigh the increased flexibility of a TFSA against the tax deductibility of an RRSP contribution. Other factors to consider are timing, age, and marginal tax rates: TFSA withdrawals are tax-free, whereas RRSP/RRIF withdrawals are fully taxable. If you intend to withdraw funds from your TFSA shortly, do so before the end of 2021. In 2022, the withdrawal amount will increase the TFSA contribution room. Withdrawals increase future contribution room based on the withdrawal amount; however, this new room is only available in the calendar year following the withdrawal.

Tax-loss selling

Tax-loss selling is a popular year-end “silver lining” strategy used to realize tax benefits associated with an underperforming investment. Suppose your advisor or tax specialist informs you that you have securities in a non-registered account At the end of a financial year worth less than the adjusted cost base. You will incur a capital loss if you sell them before the end of the calendar year. To take place in 2021, the transaction must be posted three business days before December 31, depending on the fund. If no capital gains occurred in 2021, the capital loss could be used to offset Taxes overdue on capital gains reaped during the year or in any of the three prior taxation years.

Deferring realization of a capital gain

Taking advantage of lower graduated tax rates in separate calendar tax years can decrease your overall tax obligation. Deferring realized gains until the following calendar year is a common year-end tax strategy. For example, delaying the sale of a security with an unrealized again until January 1, 2022, postpones the tax bill associated with the gain until April 30, 2023. Other factors also come into play. For example, if the taxpayer is on maternity or paternity leave this year, they will most likely next year they will be in a lower tax bracket, so it would be best to realize a disposition in 2021. Also, acknowledge the fact that tax rates change from year to year. Your advisor can assist you in determining whether this strategy is appropriate for you.

Charitable contributions

You can donate to a registered charity by December 31, 2021, and receive a tax credit for the fiscal year 2021. Make sure that the qualifying charity provides you with a tax receipt. Remember that any eligible amounts above $200 qualify you for a higher federal credit rate of 29 percent (up to 33 percent for high-income earners) versus 15 percent. Provincial credit rates vary but generally rise at that level as well.

A popular alternative is to make an in-kind donation of securities with an unrealized capital gain to a charity. The deposit may be the more cost-effective option when deciding between donating cash and making such an investment because such an in-kind disposition is tax-free. You will also acquire a tax receipt for the security’s fair market value at the time of donation.

Consider the timing of investment purchases

Keep track of the distribution date for any mutual funds on your radar, especially if they are not registered. Earnings in non-registered accounts are taxed. When it comes to exchange-traded funds (ETFs) or mutual fund trusts, taxable distributions will take place on distribution dates, often near the end of the calendar year. Each distribution includes investors’ proportionate share of accumulated underlying realized income up to that date. So, if you buy a fund at a certain point in time, you’re investing in the fund’s accumulated earnings.

In the case of new purchases, consult with your advisor to see if you should consider purchasing after the distribution date to reduce your tax bill for the current year. Investing in a segregated fund is one option for obtaining pro-rated distributions (only for the investment period).

Takeaway

This article is planned to provide high-level insights as an individual Canadian taxpayer approaches the fiscal year’s end. Please work with your team of advisors to optimize your year-end tax position while considering all aspects of your financial plan.

The facts in this article are provided for informational purposes only and are not intended to provide specific financial, tax, insurance, investment, legal, or accounting advice and should not be relied on as such. It gets not intended to be a specific offer to buy or sell securities. Before implementing any of the strategies described in this article, you should always consult with your financial advisor or a tax specialist.

Few Answers to Questions

  1. What are the three fundamental tax planning strategies?

There are several approaches to tax planning, but the three main ones are to reduce your overall income, increase your number of tax deductions throughout the year, and take advantage of certain tax credits.

  1. What are the reasons for tax planning?

The following are the main benefits of tax planning:

  • The smooth operation of the financial planning process gets facilitated by tax planning.
  • Tax payment compliance reduces legal entanglements.
  • Tax planning allows taxable income to get directed toward various investment plans.
  • You can save money by planning your taxes. 
  1. What can effective tax planning accomplish?

Proper tax planning can help you achieve the following objectives: Reduce your tax liability for the current year. Tax liability for the current year gets deferred to future years. Reduce any potential tax liabilities for the coming years.

  1. How can one lower my taxable income in Canada?
  • Maintain detailed records
  • Fill out your taxes on time.
  • Hire a member of your family.
  • Personal expenses should be kept separate.
  • Invest in RRSPs and TFSAs.
  • Losses should be written off.
  • Deduct your home office expenses.
  • You can claim moving expenses and much more.