Year End Tax Tips
Ensure your clients reap the benefits of the 2011 tax year
Hard to believe it’s that time of the year again. Before you know it, the eggnog will be flowing and you will be making your tax resolutions for the New Year. But before we get carried away with thoughts of a fresh start, let’s take care of any unfinished tax business for 2011 by reminding clients of several year-end tax tips, including some classics, before it’s too late to reap the benefits for the 2011 tax year.
Tip 1: Tax-Loss Selling
Tax-loss selling is the practice of selling securities that are in an accrued loss position at year-end in order to offset capital gains realized earlier in the year. With tax-loss selling, to guarantee that a trade of public securities is settled in 2011, the trade date must be December 23, 2011, or earlier. This ensures the settlement takes place in 2011 and that any losses realized are available to the taxpayer this year. You may note that this is one day earlier than most years since December 31st falls on a Saturday in 2011. Any trade made after December 23, 2011, will not settle until 2012, and therefore those losses would not be available until next year.
Hoping a losing investment will recover such that you may be tempted to buy it back shortly after selling it? If so, just a reminder to be wary of the nasty “superficial loss” rule. A superficial loss occurs when you sell an investment to realize the loss only to buy it back within 30 days after the sale date. The CRA can deny a superficial loss and instead add it back to the adjusted cost base (tax cost) of the repurchased security, meaning the benefit of the capital loss can only be obtained when the repurchased security is sold again and not repurchased within 30 days.
Tip 2: Turned(ing) 71 in 2011?
Registered retirement savings plan (RRSP) annuitants who turned 71 in 2011 must convert their RRSPs into either a registered retirement income fund (RRIF) or a registered annuity on or before December 31, 2011. In addition, any final contributions to your RRSP must be done by December 31 as the extra 60 days advantage of delaying until March 1, 2012, won’t apply this year. If, however, the RRSP annuitant has a spouse or partner under age 72, contributions may continue to be made to a spousal RRSP in his or her name, provided the contributing spouse still has contribution room.
Finally, if you’re 71 and don’t have a younger spouse or partner but still have earned income from 2011 that will create RRSP contribution room for 2012, consider making a deliberate overcontribution in December 2011 before converting to a RRIF. While you will pay a penalty tax of 1 per cent on the overcontribution for the month of December, when new RRSP room opens up on January 1, 2012, the overcontribution problem disappears and you can deduct the 2011 contribution in 2012 or a future year.
Tip 3: Contribute to an RESP
If you have a child or grandchild who has never participated as a beneficiary in a Registered Education Savings Plan (RESP) and who turned 15 in 2011, December 31 is your last chance to contribute at least $2,000 to his or her RESP in order to collect the 20 per cent Canada Education Savings Grant (CESG) for 2011 and create eligibility for CESGs in 2012 and 2013. If you miss the deadline, the child or grandchild will not be eligible for any CESGs in the future.
Each beneficiary who has unused CESG carryforward room may receive up to $1,000 of CESG annually, with a $7,200 lifetime limit, up to and including the year in which the beneficiary turns 17. If enhanced catch-up contributions of $5,000 (i.e., twice the normal $2,500 annual contribution needed to maximize the CESG) are made for just over seven years, you’ll receive the maximum CESG amount. If you have less than seven years before your child turns 17 and you haven’t maximized RESP contributions, consider making a contribution in 2011.
Tip 4: Pay investment expenses and deductible interest
To deduct any investment-related expenses on your 2011 tax return, the amounts must actually be paid by year-end (December 31). Such expenses include interest paid on money borrowed for investing, investment counseling fees for non-registered accounts, professional accounting services for tracking rental or business income, and safety deposit box rental fees.