John Natale, Assistant Vice President, Tax and Retirement Services at Manulife
Some methods for reducing taxes are less known than others, and Canadians sometimes fail to deploy even the better-known ones because they wait too long to act, says John Natale, Assistant Vice-President, Tax & Retirement Services, Manulife Investments. The waning days of 2012 are a time to make sure that you don't lose out on any potential tax savings, he says, consider the following tips.
1. Realize a capital loss.
If you have any capital gains this year, or in the preceding three years, you may wish to realize a capital loss before the end of the calendar year to offset part or all of those gains and reduce your taxes[1]. Capital losses need to be deducted first against any capital gains in the current year. If you still have an excess on the loss side of the ledger, you can carry that back three years, or use it in any future year.
If you wait until next year (2013) to realize capital losses, and you want to carry the loss back to offset a capital gain from a previous tax year you would have to wait until you file your 2013 tax return, likely early 2014, to realize the tax savings. Furthermore, you could only carry back excess capital losses to 2010, and would lose the opportunity to apply the capital losses against any capital gains realized in 2009.
2. Make a spousal RRSP contribution.
For spouses in different tax brackets, there is an income-splitting strategy. A contribution to your spouse's Registered Retirement Savings Plan (also known as a spousal RRSP) provides a tax deduction for you. However, your spouse needs to wait three years after a contribution is made before making a withdrawal from a spousal RRSP to avoid it becoming taxable to you – the contributing spouse[2]. So by making the spousal RRSP contribution in calendar year 2012, you benefit from the deduction at your tax rate and your spouse can potentially withdraw the funds as early as 2015 and have the income taxed in their hands, at their tax rate. This could save you up to thousands of dollars in taxes depending on the spouses' respective tax rates. Waiting until the first two months of 2013 to make the spousal RRSP contribution means that the spouse will have to wait till 2016 before withdrawing that money without it being taxed at the contributing spouse's marginal tax rate.
3. If you're turning 71, fill up your RRSP room.
You can't add to your RRSP in the first 60 days of 2013, if you turn 71 in 2012. You only have until December 31 of this year before your RRSP closes. You still can contribute to a spousal RRSP until the last day of the year your spouse turns 71. If you don't have a spouse and you have RRSP room, waiting until January would mean losing the opportunity to contribute to your RRSP.
You don't have to deduct your RRSP contribution in the year you made it. Say you have $50,000 of room and you use it all up by making a lump sum contribution before closing your RRSP. You could claim the deduction in whatever year(s) are most beneficial to you. For example you could claim a $5,000 deduction each year for 10 years. This deduction will reduce your taxable income, and can help avoid or reduce the clawback of federal benefits such as Old Age Security.
4. Pay tax-deductible or tax-creditable expenses before year-end.
A variety of expenses can only be claimed as a tax deduction or tax credit on your tax return if the amount is paid by the end of the calendar year. If the intention is to pay a tax-deductible or tax-creditable expense early next year, consider paying the amount by the end of this year in order to get the benefit of the tax deduction or tax credit on this year's tax return.
Examples of tax-deductible expenses include interest, carrying charges, and employment related car expenses. Examples of tax-creditable expenses include medical expenditures, donations and children's' fitness and arts programs.
5. Make charitable donations.
If you include these donations on your 2012 tax return, the benefit is obvious – you receive the tax benefit a year earlier than if you had waited till your 2013 return. And consider the $200 threshold: On the first $200 donated, the federal tax credit is worth 15 per cent, and 29 per cent on the balance. Provincial tax credits also provide for higher credits after the first $200. You can pool your tax donations between spouses. You can also carry forward donations for up to five years, so you minimize the number of times you hit the $200 threshold. Keep in mind that if you donate non-registered mutual funds, segregated fund contracts or stocks in kind (i.e. transfer ownership to a charity) you will get a charitable receipt for the fair market value and the tax on any capital gain will be eliminated.
This commentary is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.
[1] You must keep the "superficial loss rules" in mind which limit your ability to claim a capital loss. Your loss may be denied if the same or identical asset is acquired within 30 days before and after the sale and is still held 30 days after the sale by you, your spouse or a corporation controlled by you.
[2] These are known as the spousal RRSP attribution rules. In order to avoid these attribution rules on a withdrawal from a spousal RRSP, there must not have been a contribution to any spousal RRSP in the year of withdrawal or the 2 previous years.