December 2009

10 things to do before the end of the year

Many of the decisions you make now could mean all the difference in April, when you file your tax return. Here’s a list of the 10 most important decisions to consider right now in order to take full advantage of existing programs and keep the taxman as far away as possible.

  1. Contribute to your RESP
    Contribute to your Registered Education Savings Plan right now to obtain your Canada Education Savings Grant, which corresponds to 20% of the contributions you make, up to a maximum of $500 a year and $7,200 over the lifetime of the plan. If you live in Quebec, you are entitled to a Quebec Education Savings Incentive, adding another 10% to your capital, up to a maximum of $250 a year and $3,600 over the lifetime of the RESP. And the earlier you contribute, the longer your money will grow in a tax-deferred environment to finance your children’s or grandchildren’s future post-secondary studies.

  2. Contribute to your RRSP
    Contributing to your RRSP reduces your 2009 taxable income by the same amount as your contributions. You have up to the 60th day of 2010 to contribute, but why wait? Your savings can start to grow right now and be tax-deferred… until you retire.

  3. Contribute to your TFSA
    You can contribute $5,000 to your Tax-Free Savings Account for the 2009 taxation year. Your TFSA doesn’t provide any tax deductions, but it’s more flexible than an RRSP since your capital, return and withdrawals are all protected against taxes … forever. If you don’t contribute the entire $5,000 in 2009, you’ll have additional contribution room in 2010 – but, again, the earlier you contribute, the earlier your money is sheltered against taxes.

  4. Realize your losses – or your gains
    Given the markets’ behaviour this year, it’s likely that some of your investments have generated a loss. You can apply these losses against capital gains you’ve accumulated elsewhere. So, by selling your stocks at a loss, you can reduce your 2009 income taxes and, in some cases, recover the taxes you paid on your capital gains of the past three years. Conversely, if you sell some of your investments at a profit, you can apply the capital gain against losses you’ve realized on other investments earlier in the year. Obviously, this strategy doesn’t apply to your tax-deferred or tax-free accounts, like your RRSP, your RESP, or your TFSA.

  5. Consider renovating now!
    The Federal Government’s Home Renovation Tax Credit program is almost over. You have till January 31st to complete the work and claim the credit (although goods purchased before the deadline will qualify even if they’re not yet installed). If you live in Quebec, you have until December 31st to sign an agreement with a contractor and make sure you are entitled to the provincial tax credit.

  6. Split your pension income
    When you retire, it could be very profitable for you, as a couple, to split your income between the two of you so as to reduce your combined income tax rate. Make sure you understand the income-splitting rules that have been in place for the past two years, and which apply to certain pension incomes: they could make it possible for you to save up to several thousands of dollars every year. Not retired yet?  Spousal RRSPs and TFSAs can also be used, in advance, as part of an income-splitting strategy.

  7. Be generous
    If you’d like to give to a charity (and God knows these organizations have fallen on hard times), do so before the end of the year.  Your donation could be rewarded with a substantial tax credit, as well as a capital gain exemption if it’s in the form of securities.

  8. If you own a small business
    Small business owners have many decisions to make at year-end, but one of the most important is how to divide their income between salaries (which include all bonuses) and dividends. To do this, you not only have to consider that dividends are taxed less than other source of income, but also how this decision will impact corporate profits, which are taxed at a lower rate up to a certain ceiling. In short, talk to your accountant as soon as possible!

  9. Buy a computer
    Here’s another tip for company owners and independent workers: if you’re planning to buy a personal computer or a new operating system for your existing computers, buy it now and give yourself a Christmas gift. Thanks to an exceptional budgetary measure, you can deduct the total cost of your purchase in 2009, rather than amortize it.

  10. Pay your old taxes first
    Saving on taxes is a good thing, but paying old bills is even better. If you are carrying a balance from a past fiscal year or have instalments to pay, make sure everything is in order because interest charges and penalties can sometimes bring surprises, especially since they are not deductible.

This Top-10 list provides an overview of many of the decisions you can make right now and that could have an impact on your tax bill. There are several others that apply to specific cases, but that are no less important. This is why you should make sure that your to-do list for the next few days includes meetings with your financial services professional, your accountant and, if necessary, your tax specialist!