December 2011

Sow now, reap in April!

Sow now, reap in April!

Ten things you can do between now and the end of 2011 to pay lower taxes in April 2012.

Sow now, reap in April!In just a few more days, we will turn the page on another year. But unless you want to turn the page on some fantastic opportunities for tax savings as well, consider acting on the suggestions below without delay!

“Realize” your capital losses
With the markets having gone through another turbulent year, some of your investments might now be worth less than their acquisition value. From a tax perspective, these losses on paper are really an asset, since they can help to reduce your tax bill. If you “realize” these losses by selling the investments in question, they can be applied against capital gains you have realized on other investments, thus lowering your net taxable capital gains. Any losses realized in 2011 must be applied against 2011 gains first, but any remainder can be applied against the three previous years, or deferred for use in the future. Note, of course, that this strategy cannot be used with securities held in an RRSP, an RRIF, a TFSA or an RESP, where tax is not a consideration.

Transfer your unrealized capital losses
In cases where only one spouse has realized capital gains this year or in the prior three years, the Canada Revenue Agency allows the taxpayer to transfer paper losses (which have not yet been realized) to the spouse. This strategy can be useful when the income difference between the spouses is such that the transfer results in a better marginal tax rate, or when the spouse with no losses to realize has a very limited life expectancy. Be sure to consult your accountant if you think that this measure could apply in your case.

Contribute to an RESP
Postsecondary education is set to become increasingly expensive, especially in Quebec, where tuition fees are expected to rise by $1,625 over the next five years. More than ever, parents, grandparents, godparents – in fact, anyone who cares about a child’s future – should be contributing to the child’s registered education savings plan (RESP). Not only will the contributions be tax sheltered as they accrue, but they will also confer eligibility for annual grants amounting to 20%, 30% or even more, depending on the province.

Contribute to an RRSP
The venerable RRSP will be turning 55 in 2012, but it won’t be thinking about retirement! By making a contribution you reduce your taxable income, which gives you not only a direct tax saving, but also indirect savings through access to a variety of tax credits and benefits that are reduced or eliminated when your income is over certain thresholds. As well, amounts held in an RRSP are sheltered from taxes until you retire. And finally, even though Canada now allows pension income splitting, the RRSP can be a component of some very advantageous income splitting strategies for spouses. You have until the 60th day of 2012 to make your contribution for 2011 – but why wait?

Contribute to a TFSA
The TFSA is another high-performance vehicle when it comes to taxes. It doesn’t entitle you to a deduction, but the income that builds up in your account is entirely free from taxation, even when you withdraw it. As well, withdrawals from a TFSA do not affect your entitlement to various social security benefits (notably the Old Age Security program) and income-based tax credits. That’s why any good financial plan should ideally combine the RRSP, RESP and TFSA (based on the availability of funds, naturally).

The HBP... helps buy property!
The Home Buyers’ Plan (HBP) allows you to withdraw as much as $25,000 from your RRSP, with no tax withheld, to finance the purchase of your first home. The “first-time buyer” can also receive a tax credit of $750. Keep in mind, however, that all withdrawals under this plan must be made in the same calendar year; tax will generally be applied on withdrawals made in the following year. You still have a few days to act quickly.

Pay your tax instalments a.s.a.p.
Can you afford to pay 5% to 7.5% interest on money you owe to Revenue Canada, and up to 16% on what you owe to your provincial government (depending on the province)… when your savings account gives you barely 1%? Pay your tax instalments as soon as you can. If you have to choose, prioritize according to which level of government charges the most. Borrow the money if necessary, providing that you can do so at a rate that is lower than the interest charged on late tax payments. And don’t forget that by maximizing your RRSP contributions you can reduce your taxable income and, consequently, the tax instalments you might be asked to pay next year.

Split your pension income
Since 2007, it has been possible to split pension income between spouses, the principle being to optimize the couple’s tax load by making a transfer to the spouse with the lower income in order to reduce the marginal tax rate of the spouse whose income is higher. The greater the income difference between the spouses, the more advantageous this strategy. About 60% of retired couples in Canada use this measure to save on their taxes – savings that can be as much as $1,000 to $3,000 a year. However, this kind of splitting can be tricky to set up, since it affects up to 24 items on your tax return. Make sure that you have a good tax advisor with good tax software!

Give strategically
Cash donations to registered charitable organizations entitle you to a tax credit. But you can also donate listed securities or mutual fund units. The advantage? The accumulated capital gains on these securities are not included when calculating your income. Thus you save the equivalent of the taxes on your capital gains in addition to receiving a tax credit. This approach is even more beneficial when it’s a private company that donates the securities.

Strike the right balance of salary, dividends and pension plan
If you own a small or medium-sized business, it is once again time to evaluate the various ways of dividing your income between salary and dividends. Take note of RRSP and QPP contributions, and the minimum salary required to qualify for certain tax measures, such as the child care expenses deduction. Keep in mind that each scenario will also have an impact on the tax rate paid by your company. Finally, assess the suitability of an individual pension plan. Deductible contributions paid by the business could end up being a better bet than making your own contributions to an RRSP. In short, talk to your accountant without delay!


Of course, these ten ideas only provide a starting point. Your financial services professional will be able to suggest other approaches that may be better suited to your personal profile. But beware:  for most of them, once the clock strikes midnight on December 31, it will be much too late!