While tax-efficient investing should be a year-round activity, for many of us tax planning is a topic that only gets our attention as year-end approaches. Here are some tips that may save you money on your taxes.
Top up your Registered Retirement Savings Plan
Wednesday, March 1, 2018, is the deadline to make an RRSP contribution that can be claimed for the 2017 tax year, but making a contribution earlier will maximize tax-deferred growth. Make sure that you don’t over-contribute, which could lead to a penalty tax of 1% per month on the excess. Although $2,000 of penalty-free excess is permitted, this amount is not tax-deductible. Find your RRSP contribution limit on your most recent notice of assessment or reassessment from the Canada Revenue Agency (CRA).
Offset capital gains with tax-loss selling…
Tax-loss selling is a strategy some investors use to reduce their tax bills. If you sell investments that have declined in value since you bought them, you can use the capital loss to offset any capital gains you may have from the sale of other investments. Generally speaking, for tax purposes, you can only use a capital loss to reduce capital gains. If you can’t claim your capital losses in the current year, you can either carry them back to any of the three previous years or carry them forward indefinitely.
If you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you factor in the foreign exchange gain or loss.
For tax purposes, a disposition is not considered complete until the transaction has settled. At MD, this process generally takes two business days. This means that for a transaction to be considered settled in 2017 and in order for you to claim any potential loss on a sale this tax year, trades must be initiated by December 27, 2017, for both Canadian and U.S. equities. If you sell after that date, the loss will be recorded for tax purposes in the following year.
… but beware of superficial loss rules
If you sell a security at a loss and repurchase it within 30 days, that capital loss is considered a “superficial loss” and you won’t be able to use it to offset capital gains. These “superficial loss” rules also prevent your spouse–or a corporation controlled by you or your spouse–from repurchasing the security. Other restrictions may also apply. Talk to your MD Advisor and tax advisor before implementing a capital loss planning strategy.
Donate more than cash
Instead of donating cash, giving qualified units of a mutual fund or stock “in kind” to a registered charity may be a more tax-efficient choice. Provided the mutual funds or stocks donated meet certain conditions, you will not be taxed on any accrued capital gains on the donated securities, and you will get a charitable donation tax receipt equal to the fair market value of the shares or mutual funds gifted. If, instead, you sell the investments and donate the cash, you will still get a tax credit on the value of your donation, but you will also be taxed on any capital gains that arise from the disposition of the investments. For more information on donation limits, visit the CRA website.
Last year of the First-Time Donor’s Super Credit (FDSC)
This credit is expiring at the end of 2017. If you’re a first-time donor, you may be entitled to a 40% federal non-refundable tax credit for donations of $200 or less, and a 54% federal non-refundable tax credit for the portion of donations over $200, but not exceeding $1,000. Certain conditions apply. More information is available on the FDSC website.
Contribute to a tax-free savings account (TFSA)
Contributions to a TFSA are not tax deductible, but investment growth in a TFSA and withdrawals from a TFSA are not taxed. Unused contribution room from prior years carries forward indefinitely. So if you haven’t contributed to a TFSA in the past, you could contribute up to $52,000 in 2017.
There is no deadline for making a TFSA contribution, but if you are planning to withdraw money from your TFSA in the near future, consider doing it before December 31, 2017. Amounts withdrawn in 2017 will be added to your TFSA contribution room as of January 1, 2018. Learn more about the MD TFSA.
Don’t miss the RESP deadline
To receive the Canada Education Savings Grant (CESG) in 2017, contributions to a registered education savings plan (RESP) must be made by December 31 (additional grants may also be available through other federal or provincial programs). Learn more about RESPs.
We Can Help
Contact your MD Advisor to discuss how these tax tips may work for you
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