Time is running out ... and not just for holiday shopping. With only two
weeks left until the year-end, now's the time to consider implementing some
last-minute tax planning ideas, many of which must be executed before Dec. 31 to
be effective for 2005.
Here's my Top 10 list of year-end tax-planning strategies for 2005:
1. TAX LOSS SELLING
If you've got stocks that are underwater, you might want to consider
disposing of them before the end of the year to be able to take advantage of any
capital losses on your 2005 tax return. Capital losses must first be used to
offset any capital gains you realized in 2005. If you had insufficient gains in
2005, you may carry any excess capital losses back to offset gains realized in
2004, 2003 or 2002 or can carry forward the excess losses indefinitely. Remember
that you can also use the capital loss to offset any capital gains distributions
from mutual funds, many of which distributed yesterday. Any trades must settle
before year-end for the loss to be realized in 2005, which means they must
settle by Friday, Dec. 30 since the markets are closed on Saturday, Dec. 31.
Keep in mind that since it typically takes three days for a trade to settle, the
deadline for ensuring that a TSX trade settles by year-end this year is Dec. 23,
since the TSX is also closed on Monday, Dec. 26 and Tuesday, Dec. 27.
2. PAY INVESTMENT EXPENSES BY DEC. 31
In order to be able to deduct any investment-related expenses on your 2005
tax return, the amounts must be actually paid by year-end. Such expenses include
interest you paid on money borrowed for investing, investment counselling fees
for non-RRSP accounts, professional accounting services for tracking rental or
business income and safety deposit box rental fees, assuming the box is used to
hold income-producing securities.
3. LAST CHANCE AT RESP CONTRIBUTIONS FOR 15-YEAR-OLDS
The Registered Education Savings Plan allows you to save for children's
post-secondary level education in a tax-effective manner. The government will
also help you save by providing a Canada Education Savings Grant (CESG) equal to
20% of the first $2,000 of annual RESP contributions per child, or $400
annually. Enhanced CESGs of 40% and 30% are also available on the first $500 of
annual RESP contributions for children from low- and middle-income families.
If you have a child or grandchild who has never participated as a beneficiary
in an RESP, and who turned 15 sometime in 2005, Dec. 31 is your last chance to
contribute at least $2,000 to his or her RESP to be allowed to collect the
maximum CESG for 2005 and create eligibility for CESGs for 2006 and 2007. If you
miss the deadline, the child or grandchild will not be eligible for any grants
in the future.
4. FINAL RRSP CONTRIBUTION
If you turned 69 earlier this year, you only have until Dec. 31 to make your
last RRSP contribution, if you plan to do so. You don't have the advantage of
procrastinating until March 1, 2006, like the rest of us do. If, however, you
have a spouse or partner who is not yet 70, you can continue contributing to a
spousal RRSP in his or her name, provided you still have contribution room.
5. CONVERTING YOUR RRSP
As above, if you turned 69 in 2005, you must convert your RRSP into either a
Registered Retirement Income Fund (RRIF) or an annuity by Dec. 31. Failure to do
so will result in the entire amount being taxable to you in 2005. Be sure to
discuss your conversion options with your financial advisor before it's too
late.
6. CHARITABLE DONATIONS
Dec. 31 is also the last day to make a donation and get a tax receipt for
2005. Scrambling to donate? Remember that many charities now offer online,
Internet donations where an electronic tax receipt is generated and e-mailed to
you instantly.
In addition, www.canadahelps.org is a registered charity which can accept
charitable donations online for 80,000 charitable organizations. Once you donate
using a credit card, you will receive an immediate, secure PDF tax receipt, by
e-mail. CanadaHelps then disburses the funds, less a 3% transaction fee,
directly to the designated charity.
7. GIFTS TO EMPLOYEES
If you're an employer, you have the opportunity to make up to two non-cash
gifts a year on a tax-free basis to your employees for special occasions such as
Christmas, Hanukkah, marriage, birthdays or other similar events, where the
combined cost of the gifts is less than $500 (including tax) a year. Note that
this administrative concession by the Canada Revenue Agency extends only to
physical gifts and not to cash (or near-cash gifts such as gift certificates or
gift cards).
8. PURCHASE BUSINESS ASSETS
If you're self-employed or the owner of a small business, you may want to
consider accelerating the purchase of new business equipment or office furniture
you were planning to buy next year. You are allowed to deduct, under the
"half-year rule," one half of a full year's tax depreciation (capital cost
allowance) in 2005, even if you bought it on the last day of the year. For 2006,
you can then claim a full year's depreciation.
9. DELAY WITHDRAWALS UNDER HOME BUYERS' PLAN
Planning to buy a new home in January? Delay withdrawing money from your RRSP
under the federal Home Buyers' Plan until the new year to allow you one
additional year before repayments must begin. You would have to start repaying
money withdrawn in December in January, 2007. By waiting until January, you
delay repayment until 2008.
10. REDUCED SOURCE DEDUCTIONS
With the new year just around the corner, what better time to start planning
for 2006 -- especially if you routinely get a large tax refund each spring? By
applying to the CRA to take into account various tax deductions, such as RRSP
contributions or childcare deductions, the CRA can authorize your employer to
reduce the amount of income tax withheld on your employment income. This way you
pay less income tax during the year rather than overpaying and then applying for
a refund in April. The benefit is you get to keep your money instead of loaning
it, interest-free, to the CRA. To get a head start for 2006, now's the time to
send a completed CRA Form T1213 "Request to Reduce Tax Deductions At Source for
Year(s) _____," with all supporting documents, to the Client Services Division
of your local tax services office to ensure that the tax deduction can be in
place early in 2006.