With just over a month to go until the end of 2013, here's a quick look at some year-end tax tips you may wish to keep in mind to ensure you don't miss out on tax savings for 2013.
Tax Loss Selling
Tax-loss selling involves selling investments with accrued losses at year end to offset capital gains realized elsewhere in your portfolio. Any capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset capital gains in other years. Note that if you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account.
In order for your loss to be immediately available for 2013 (or one of the prior three years), the settlement must take place in 2013, which means the trade date must be no later than December 24, 2013.
A reminder that if you plan to repurchase a security you sold at a loss, beware of the "superficial loss" rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date. Under the rules, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means the benefit of the capital loss can only be obtained when the repurchased security is sold.
Similarly, while it may at first glance be tempting to transfer an investment with an accrued loss to your RRSP or TFSA to realize the loss without actually disposing of the investment, such a loss is specifically denied under our tax rules. To avoid this problem, consider selling the investment with the accrued loss and contributing the cash from the sale into your RRSP or TFSA. If you want, you can then buy back the investment inside your RRSP or TFSA once the 30-day superficial loss waiting period is over.
Convert your RRSP to a RRIF by age 71
If you turned age 71 in 2013, you have until December 31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity.
It may also be beneficial to make a one-time over-contribution to your RRSP in December before conversion if you have "earned income" such as (self) employment or rental income in 2013 that will generate RRSP contribution room for 2014. While you will pay a penalty tax of 1% on the over-contribution (above the $2,000 permitted over-contribution limit) for December 2013, new RRSP room will open up on January 1, 2014 so the penalty tax will cease come January. You can then choose to deduct the over-contributed amount on your 2014 (or a future year's) return.
This may not be necessary, however, if you have a younger spouse or partner, since you can still use your contribution room after 2013 to make spousal contributions to their RRSP until the end of the year your spouse or partner turns 71.
TFSA Withdrawals
While there is no deadline for making a TFSA contribution, you may want to plan carefully if you are considering a TFSA withdrawal in the near future. Under the rules, if you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated, but only in the following calendar year. As a result, if you are considering a TFSA withdrawal in early 2014, think about withdrawing the funds by December 31, 2013, so you won't have have to wait until 2015 to re-contribute that amount.
Charitable giving
December 31 is the last day to make a donation and get a tax receipt for 2013. Keep in mind that many charities offer online, Internet donations where an electronic tax receipt is generated and e-mailed to you instantly. Gifting publicly traded securities, including mutual funds, with accrued capital gains "in-kind" to a registered charity not only entitles you to a tax receipt for the fair market value of the security being donated, it eliminates capital gains tax.
This year saw the introduction of the new Federal First-Time Donor's Super Credit (FDSC), which you can claim if neither you nor your spouse partner has claimed the charitable donation tax credit in any of the five preceding tax years. The FDSC, which can be claimed once from the 2013 to 2017 taxation years, provides an additional 25% tax credit on total monetary (not "in-kind") donations up to $1,000 that are made after March 20, 2013. When added to the regular federal charitable donations tax credit, tax savings would be 40% for total monetary donations up to $200, and 54% for total monetary donations between $200 and $1,000. Provincial charitable donations credits are also available to increase your tax savings.
Payments to be made by December 31
Certain expenses must be paid by year end to claim a tax deduction or credit in 2013. This includes investment-related expenses, such as interest paid on money borrowed for investing, investment counseling fees for non-registered accounts and safety deposit box rental fees. Note that 2013 is the last year you can claim safety deposit box rental fees since, as of 2014, they will no longer be tax deductible. Other expenses that must be paid by December 31 include child care expenses, medical expenses, interest on student loans and spousal support payments.