Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
They call themselves the "Reals." Graham is one of them. These are civic-minded people who dress in homemade superhero costumes and patrol neighbourhoods looking to deter crime. I met Graham at the airport and noticed the superhero costume he was carrying, which I thought was a Halloween thing. Not quite. Graham's an accountant by day, and Green Scorpion by night. The problem? Graham lives in an upscale suburb where there's no crime. There's even an online World Superhero Registry of these gunless, knifeless vigilantes.
The biggest complaints of these "Reals" is boredom due to the lack of crime and itchy spandex outfits. "I have a better idea, Graham," I said. "You're an accountant. We're coming to the end of 2009. Why not help your neighbours by setting up a desk on the street corner with a sign that says 'Free Year-End Tax Advice.' You can call yourself 'Taxman,' or 'Fiscal Guardian' or something."
"I bet you'd actually keep busy," I suggested. True - but weird. Just weird.
This leads to the inevitable question: What type of year-end tax help should Graham be giving his neighbours? Last week I started the discussion of year-end tax tips. Here are a few more for those who are investors.
Give investments to a child
Consider transferring investments to a child before year-end where that investment has dropped in value. This triggers a capital loss that you can use to offset capital gains, and passes the tax liability on any future growth in the investment to your child. Capital gains realized by minor children will be taxed in their hands - not yours. By transferring these investments today you can also minimize probate fees at the time of your death.
Donate securities
to charity
Making a donation by year-end will provide you with a tax credit for 2009. If you're considering selling certain publicly traded securities anyway, think about donating those securities to a registered charity. Any resulting capital gain on securities donated are not subject to tax and you're entitled to a donation receipt for the full value of the securities donated. The donation of appreciated securities generally makes far more tax sense than a straight donation of cash.
Claim a capital gains
reserve
If you're thinking of selling an asset by year-end at a profit, consider structuring the sale so that you collect your sale proceeds over more than one year. You're able to spread the capital gains tax liability over a period as long as five years (including the year of sale) if you take payment over five years. As a minimum, consider taking payment partly this year, and partly in January 2010 in order to spread the tax hit over two years. Speak to a tax professional to structure this properly.
Consider a tax shelter
There are a number of tax shelters available which could provide you with deductions or credits to reduce your tax burden for 2009. These shelters can come with tax risk as well as investment risk, so make sure you understand the shelter first, and get the advice of a tax professional as to how much tax risk exists. Always keep in mind the underlying investment you're purchasing. Since the investment is more important than the tax savings, ensure you're happy with the type of investment you're making.
Withdraw funds in a low-income year
Does it ever make sense to withdraw money from an RRSP or RRIF before you need the money? In some cases, yes it does. If you have little or no other income this year, you may be able to make a withdrawal from the plan before year-end and pay little or no tax on the withdrawal. It could make sense to do this where you're willing to invest that money outside the RRSP or RRIF once it's withdrawn, or where you need the money to meet certain costs of living.
Convert at least part of your RRSP to a RRIF before year-end
You're entitled to a pension credit to offset the tax on the first $2,000 of pension income annually, which includes any withdrawals from a RRIF if you're 65 or older in the year. Consider setting up a RRIF to pay out just $2,000 annually. This amount will be tax-free, thanks to the credit, if you're in the lowest marginal tax bracket and do not have any other pension income in the year.
Tim Cestnick