My grandfather was very wise. He always told me that there are three kinds of people: Those who are good with numbers and those who aren't.
I've since learned that there are three kinds of investors: Those who suffer through too much tax, those who don't care about taxes and those who add tax savings to investment returns. If you want to be in the last camp, consider the following year-end tax checklist.
Review your portfolio makeup
Consider the type of income, if any, you earned on your non-registered portfolio this year. If you earned interest income, which is highly taxed, consider restructuring your portfolio to earn that interest inside your registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA) in 2017 where it will be tax-sheltered.
Review your outstanding debt
Is the interest on your debt tax-deductible? If not, and you have non-registered investments, consider liquidating some investments (calculate the tax cost first) and using the proceeds to pay down the debt. Then reborrow to replace the investments. This can set you up for an interest deduction in 2017 on the new debt.
Observe investment deadlines for 2016
If you hope to sell an investment at a loss this year to apply the loss against capital gains, the settlement date (not the trade date) should fall in 2016. To ensure this happens, initiate the sale on or before Dec. 23, 2016 (for Canadian stock markets).
Time the purchase of certain investments
If you're planning to invest in an interest-bearing security, such as a guaranteed investment certificate (GIC), that has a maturity of one year or longer, consider waiting until 2017 before making the investment. By waiting, you won't have to pay tax on any accrued interest until 2018 – the year of the first anniversary of the investment. Also, consider waiting until early in 2017 to purchase any mutual funds that are expected to make taxable distributions before the end of 2016. You'd hate to pay tax sooner than necessary.
Trigger accrued losses before year end
If you have realized capital gains this year, or in one of the three prior years (2013, 2014, or 2015), consider selling your losers to apply the capital loss against those capital gains. Capital losses must be used to offset gains in the current year first, but excess losses can then be carried back up to three years or forward indefinitely.
Close out option contracts with losses
If you close out option contracts with accrued capital losses before year end, you'll be able to utilize those losses to offset realized capital gains this year, or in 2013, 2014 or 2015.
Trigger capital gains where appropriate
It can make sense to trigger a capital gain before year end if this won't result in a tax bill. If, for example, you have capital losses to use up, or where the capital gain will be taxed in the hands of someone with little or no other income (in-trust accounts for children come to mind), then triggering the gain and reinvesting the proceeds will create a new, higher, adjusted cost base in the investment – saving tax later – without triggering a significant tax liability.
Defer capital gains where appropriate
If you're thinking of selling an asset for a profit and the transaction is going to give rise to a tax liability, consider delaying that transaction until the new year to defer the tax until 2017.
Give investments to a child
Consider transferring investments to a child before year end where that investment has dropped in value. This will trigger a capital loss that you can use to offset capital gains, and will pass the tax liability on any future growth in the investment to your child. You'll also minimize probate fees on those investments at the time of death.
Donate securities to charity
Donating by year end will provide you with a donation credit, and tax savings, for 2016. If you're considering disposing of certain publicly-traded securities anyway, think about donating those securities to charity. Any resulting capital gain on the donated securities will be eliminated in addition to the tax credit you'll receive.
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 up to five years if you take payment over a period up to five years. Consult a tax pro to structure this properly.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.