Year End Tax Planning
Here we are in the final months of
2009, and I’ll bet taxes are the last thing on
anyone’s mind. Most people tend to think of taxes as
something you do before April 30th, but the problem
with that approach, is that if you wait until then
to review your business year, you’ll be too late to
make any changes that could affect your bottom line,
and ultimately your tax bill. For this reason, I
always recommend to my clients that they do some
quick year-end tax planning, to ensure that there
are no unpleasant surprises come March or April.
Tax loss selling, which is the
practice of selling off poor investments to
deliberately trigger a loss, is always an excellent
year end strategy. It allows you to carry back
capital losses to offset gains made during the past
year, as well as those made in the previous three
years, allowing you to recover some of the taxes you
may have paid in those years of growth. Although it
is often difficult to make the decision to cut your
losses on a poor investment, the ability to regain
some of those losses through tax relief can be a
good incentive. One thing you must bear in mind,
however, is that should you, your spouse or your
company repurchase those investments within a
certain period of time, the loss you triggered will
be denied under the superficial loss rules, so
implement this strategy only if you believe that
future returns on the investment will remain poor.
If you are in the fortunate position
of having extra cash to invest, you may want to hold
off until January. Mutual funds, in particular, will
distribute taxable profits at the end of December,
and I have seen cases where an investor purchasing a
non-registered fund on December 15th will receive a
large taxable dividend from a fund, despite owning
it for only 15 days. This may sound good, but
unfortunately you don’t actually get the money now,
it comes in the form of reinvested units, but you
will get the tax hit.
An investment you may want to make
before year-end, however, is a Registered Education
Savings Plan. If you have young children, and are
not using RESPs to fund their education, you should
give some serious thought to setting up a plan. Not
only do you benefit through tax deferral, by
allowing the interest to compound tax free, the
federal government will also contribute a 20% Canada
Education Savings Grant on the first $2000.00 of
annual contributions. They will also contribute
between 20% and 40% on the first $500.00 invested
each year thereafter, depending on the family’s net
income. Not many investments start with a guaranteed
return like that! Unlike RRSPs, however, the
deadline is December 31st, so if you are planning to
contribute, now is the time.
Another strategy, and in the spirit of
the upcoming Christmas season, is making donations
in order to lower your tax bill. If you know that
you are going to be taxable, one way to lower that
amount is to make donations to your favourite
charities before the end of the year. Each time we
watch the news we see mind-numbing poverty, in
Africa, the Middle East and in our own city streets,
and I can’t think of a better way to lower your tax
bill than to send money to those desperately in
need.
Whether or not any of these particular
strategies will work for you, it is important to
always take a look at your finances before the end
of the year, to make sure that you have done all you
can to ensure that you will be paying the lowest
possible amount of tax come April 30th.
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