The following checklist will show you what you can do now to minimize the tax you’ll pay in April.
If you own some poorly performing stocks, mutual funds or ETFs, consider selling them before the year is over, says Cleo Hamel, a senior tax analyst at H&R Block. You can then take the capital loss—the difference between what you paid for the investment and what you sold it for—and use it to offset gains you’ve made in the past three years. For instance, let’s say you made $1,000 on a stock X this year, but lost $1,000 on stock Y. If you sell stock Y before the end of the year then you can use that loss to offset your gain, provided the shares were held in a taxable account (i.e. outside of a TFSA, RRSP, RESP, etc).
More importantly, losses can be carried forward indefinitely. In other words, if you sold stock Y in 2009 at a loss you can use it to offset gains today. If you still like company Y, you can always buy it back, but wait at least 30 days before you do. If you repurchase these shares any sooner Revenue Canada will view it as a superficial loss and won’t allow the deduction.
Pay down payment plans
Private school tuition and certain medical bills can be tax deductable, but you can only claim what you paid in a year. If you’re like many Canadians who pay those bills in installments then you may not get the full deduction in the current tax year. If you can afford it, consider making more of those payments before December 31 to claim these expenses now. “I always like to say to pay as much as you can in terms of deducible expenses,” says Adam Salahudeen, vice-president of tax and estate planning at Richardson GMP.
Start your CPP
If you’re under 65 and thinking about collecting CPP be sure to apply for it now; if you wait you could end up paying a higher penalty. If you’re under 65 and collect CPP you face a per-month penalty of 0.52%. Next year, though, that figure will rise to 0.54% and climb to 0.6% in 2016. Doug Carroll, vice-president of tax and estate planning for Invesco, points out that if you’re over 65, you should consider waiting until 2013 to collect. Currently, you get a per month premium of 0.64% if you start taking CPP after that age, but it will increase to 0.7% next year. (For more info on taking CPP early please see CPP: Less now or more later?)
Final RRSP Contributions
Generally, you can put money into your RRSP until March 1, unless you are 71-years-old. If you’re 71 this year, your final contribution deadline is December 31. However, if you’re still earning an income, your contribution room will continue to increase in 2013. How can you take advantage of that extra room even though you’re not allowed to contribute? Carroll suggests over contributing before the year ends. You will be dinged with a 1% over contribution penalty, but only for one month. “The person will be back onside come January once the newly earned room is credited,” he writes in a report.
Withdraw from your TFSA
While the contribution room in your TFSA accumulates over time, there is one important restriction that you need to be aware of. Withdrawals from your TFSA made this year will only be added back to your contribution room at the beginning of the following year. If you know you’ll need money in early 2013, take the cash out before December 31. That way you can re-contribute those dollars starting in January; if you wait a month you won’t be allowed to reinvest the amount of money you withdrew from your TFSA until 2014.
These are the some of the big things to watch out for, but there are other tax issues that must be taken care of before December 31. Talk to an account to make sure you don’t miss anything.
The end of the year is also a great time to start organizing and tracking down your bills for April. “Get your paperwork together,” says Hamel. “Now’s the time to start thinking about these things.”
MoneySense‘s tax columnist Evelyn Jacks has even more year end tax tips. For more year-end tax tip click here to read her column.