As the year winds to a close there are tax-related financial strategies people should consider, ensuring their affairs are in order for 2019 and beyond. Here are a few of them.
Tax Loss Selling
Those with capital gains during the year might want to consider selling assets with unrealized losses to offset the gains. This is known as tax-loss selling. The capital gains could come from one’s investment portfolio, sale of real estate or other assets.
To be sure that the loss can be applied to one’s 2018 tax return, the trade must take place no later than December 27, 2018. This will ensure that settlement occurs in the 2018 tax year.
Beware of superficial losses when tax-loss selling. A loss is considered superficial and disallowed for tax purposes when a security is sold at a loss and repurchased within 30 days. This rule applies not only for securities an individual may sell and repurchase, but trades conducted by an “affiliated person” such as a related spouse, corporation or trust.
Finally, it should be noted that capital losses can only be used to offset capital gains, not income generated from employment, dividends or interest.
Low Income Year
Those who expect to be in an unusually low marginal tax bracket for 2018 but will be in a much higher tax bracket in subsequent years, including retirement, might want to consider making an early withdrawal from their RRSP before year-end. The funds can be used for living expenses if needed, set aside in a TFSA for long-term savings or re-contributed to an RRSP in a later, high-earning year, if possible. A financial advisor can help determine if this strategy is suitable, depending on your personal circumstances.
Final RRSP Contributions
Those who turned 71 in 2018 have until December 31 to convert their RRSP to a RRIF. They must make sure any final contributions are made before that date as well. Younger Canadians have until March 1, 2019 to make RRSP contributions to be used against income earned in 2018.
While most people born in 1947 no longer make RRSP contributions, there are circumstances where it could make sense. People who had earned income in 2018 or those who disposed of a major taxable asset such as a business or investment property may wish to offset some of the taxation.
Further, RRSP contributions don’t have to be used in the current calendar year. They can be carried forward to offset future capital gains, which could come in handy if the sale of an asset will fall or settle in a future calendar year.
Charitable donations must be made by December 31 to qualify as a deduction for the 2018 tax year. Cash gifts, as well as other assets may qualify as long as a proper donation receipt is forthcoming. Those who gift publicly-traded securities to a registered charity or charitable foundation in-kind may realise an extra tax benefit in the form of any accrued capital gains tax on the asset being waived upon transfer, resulting in the charity receiving the gift’s full market value in the form of a donation.
If you need to make a withdrawal from a TFSA sometime soon and plan to replace the funds quickly, consider taking the withdrawal prior to December 31, 2018. This is because TFSA contribution room is reinstated in the following calendar year. Therefore, a person who withdraws $10,000 in 2018 may re-contribute the $10,000 in 2019, plus any other unused contribution room they might have. Those who wait until January, 2019 will not be able to replace the funds until 2020.
Effective tax planning doesn’t always start in January. By keeping these factors and others in mind throughout the year, better financial planning can be enjoyed for years to come.
As with any tax strategy, be sure to discuss it in advance with your financial advisor and accountant to ensure suitability.