2018 Year-end Tax Tips
With the New Year upon us, there is only a little time left to take advantage of tax strategies that can save you money. Luckily, we have provided a list to make planning simple for our individual and investor clients.
Tax Loss Harvesting
Review your investment portfolio to see if you own any securities or mutual funds that are sitting in a loss position. It may be worthwhile to sell these investments to offset current year gains or carry them back up to three previous tax years. Losses can also be carried forward indefinitely. If you plan on selling an investment, be aware that the settlement date must fall in 2018 or else it will not count in the 2018 tax year. Trades must be placed by December 27th, 2018 to take advantage of any gains or losses.
You may also transfer an investment sitting at a loss to a minor child. This allows you to take advantage of the loss and any future growth becomes taxable in the child’s name, since attribution rules do not apply to capital gains.
Realizing Capital Gains
If you have securities or mutual funds sitting in the gain position, review your options for selling. You may have a net capital loss carry-forward balance that can be used to offset capital gains in the current year.
Consider 2019 and whether it would be advantageous to realize the gain in 2018 or defer it to the next year. If your income is expected to go down in 2019 due to a lifestyle, such as retirement, then deferring the sale would save you money on tax and you would not have to pay the tax until 2020.
Lastly, if you are planning on disposing of capital property at a significant gain, you can structure the sale so that the proceeds are received over a period of up to 5 years. This spreads out the income so that tax can be deferred and the gain is potentially taxed at a lower rate than if it were to be all taxed at once.
If you are thinking about donating to a registered charity, you will receive a tax credit in 2018 if you do so before December 31, 2018. In addition to cash, you may donate mutual funds and securities that have increased in value. You will get credit for the full market value of the shares and the resulting capital gain will be exempt.
If you plan on withdrawing funds in early 2019, consider taking them out before the end of 2018. Doing so will allow you to re-contribute the funds in 2019 without having to wait until 2020.
Consider contributing to your RRSP to claim a deduction against your 2018 income. You may contribute up to 60 days after the end of the year (March 1, 2019). Review your 2017 notice of (re)assessment if you want to maximize your contribution by taking advantage of your available contribution limit. If you will be 71 at the end of this tax year and expect to have earned income in 2019 and later tax years, consider making a single over-contribution to your plan. Doing so will result in a penalty of 1% of the amount contributed, but the 2018 earned income will grant you the room in 2019. The tax-free growth and income on the amount contributed can greatly outweigh the cost of the 1% penalty.
Spousal RRSP Contributions
A spousal RRSP allows you to contribute to an RRSP account in your spouse’s name. You can deduct the contributions you make against your income, so if you are in a higher tax bracket, you can save more money than if your spouse made the contribution. You can contribute to the account until your spouse is 71, even if you are 71 years of age or older. Choose to contribute in 2018 and your spouse will have access to the funds on January 1, 2021 without having to worry about attribution rule.
Consider withdrawing eligible pension amounts. Up to 50% of these withdrawals can be split with your spouse, which may result in significant tax savings. If you and your spouse are 65 years or older, you will both receive the pension income amount, resulting in a $2,000 tax credit on each return. If you plan on withdrawing money from your RRSP and you are 65 or older, convert a portion your RRSP to a RRIF to make the withdrawal both eligible for pension splitting and the pension income amount tax credit.
If you expect your tax liability to be lower in 2018 than 2017, you may not need to pay your December 15th, 2018 instalment. Consider getting a tax estimate before cutting your final 2018 instalment cheque.
For more information on these strategies, contact a tax planning specialist below:
Dr. Colin Reid B.Sc, M.Sc, CFP, CIM, CFA, PhD
Let’s discuss how these strategies can save you money.