Wouldn’t it be great to pay thousands less in tax this year? What would you do with the extra money? Splurge on a warm winter holiday? Or pay off the holiday spending on your credit cards? You can slash your taxes for 2014 by following three easy steps, but you have to complete them before year end.
Step 1: Donate to save. This year you can take advantage of the First Time Donor’s Super Credit, which is available from 2013 to 2017. Normally you would get a tax credit equal to just 15% of your charitable gift for donations of less than $200, but if you’re a first-time donor, you can use the Super Credit to get 40%. Similarly, the regular tax credit rate for donations of $200 to $1,000 is 29%, but with the Super Credit, that jumps up to 54%.
That means if you give $1,000 in cash to a charity this Christmas, you’ll get back a federal credit of $512—more than half of it. Your provincial government will provide additional benefits as well.
If you donate every year and therefore don’t qualify for the Super Credit, don’t worry. There’s another way to get a big tax break while giving to your favourite cause. Instead of donating cash, you can donate investment holdings that have shot up in value over the past year. Unless those holdings are in a tax shelter, such as an RRSP or a TFSA, if you sold them off in 2014 you would have to pay taxes on any capital gains. But if you donate some or all of those investments to a charity, the transfer is tax exempt. Not only will you save on capital gains taxes, but you’ll get a charitable donation tax credit as well.
For example, let’s say you want to donate $15,000 to a charity (see page 54 for our Charity 100 grades to help you pick which one). Rather than donating in cash, you could donate $15,000 worth of stock that has seen a capital gain of $10,000.
If you didn’t donate the stock, and it wasn’t in a tax sheltered account, and you sold it this year, then half of that $10,000 capital gain would be included as part of your 2014 income, attracting taxes of about $2,300 at a 46% marginal tax rate. By donating the shares, you’ll save that amount, as well as gaining an additional $640 federally, plus provincial credits. That’s well over $3,000 in savings, depending on which province you live in.
Step 2: Invest to save. Most of you know this, but it bears repeating: lucrative tax reductions result from RRSP contributions—close to half of every dollar invested at top marginal rates. That’s big money. The RRSP contribution deadline for the 2014 tax year is March 2, 2015, but you should start thinking about how much you want to contribute now. As well, business owners should be sure to create earned income of $138,500 in 2014 to maximize RRSP contributions of $24,930.
If you happen to turn 71 in 2014, you’ll need to convert your RRSP to an RRIF or life annuity before year end. But you may want to consider making one last RRSP contribution first. An over-contribution can be made in December to use up any 2014 room. (Beware of a 1% penalty tax for December, though.) Another option: make a spousal RRSP contribution for an age-eligible spouse.
This is also a good time just to review all of your non-registered accounts. If you are considering selling off investments, run the numbers to see whether you’d pay more tax if you sold them now, or if you put off the sale until next year. As a general rule, you’ll want to sell them in years when your income is lower. Also look at whether you have capital losses from previous years that you could use to offset any gains.
Step 3: Review what you’ve paid. If you remit tax by installments and your income dropped in 2014, estimate how much you still owe before you pay your final tax installment (the due date for most people is December 15). You may find you’ve already paid off the taxes you owe for the year, so you can skip that final payment. That tip alone could pay for your winter vacation!
If you’re employed, review how much tax your employer is withholding from your paycheques to see if you can get that amount reduced in January. You probably can if you have a new dependant, you contribute to an RRSP, or you have large deductions or tax credits such as medical expenses or donations.
Finally, did you know that interest paid for loans to acquire assets with now-diminished values continues to be deductible? So does interest on insurance policy loans tapped for investment purposes, but you’ll need to file Form T2210 to claim this. Remember that safety deposit box charges were deductible for the last time on the 2013 return.
These are just a few of the things you can do before year end to pay the least taxes possible and ensure a happy financial journey into the new year—maybe even with a vacation, funded with your tax savings. Many happy returns!