While enjoying the holidays, spending time eating and giving gifts to loved ones is a large part of the end of year festivities. Giving the gift of tax savings to you and your family is often over looked. As with holiday shopping, we don’t recommend waiting until the last minute to plan for taxes, but if you are in a bind, here are some ways to save taxes before the year is out.
- Contribute to a Registered Retirement Savings Plan (RRSP) – Maximize your tax savings by giving to your retirement. You receive a deduction on your personal tax return and your retirement savings get to grow tax-free until withdrawal. Instead of buying your spouse an extravagant present this year, contribute to a spousal RRSP. You receive the deduction and the income is taxed in their hands upon withdrawal if certain conditions are met. Provided they are in a lower income tax bracket, the family gets tax savings through income splitting. RRSP contributions must be made within the first 60 days of the following year in order to be deducted. However, even if your income is lower than expected this year, you can save the deduction (up to your allowable limit) for the following year(s) while allowing the contribution to grow tax-free.
- Contribute to a Registered Education Savings Plan (RESP) – In addition to educational gifts for your children, invest in their future through a RESP. Although contributions are not deductible, RESPs grow tax-free until withdrawal, provide government top ups and allow for income splitting. Any investment returns earned in a RESP grows tax-free until withdrawal much like an RRSP. The government will top up annual contributions by 20% for the first $2,000 of contributions per year (i.e. the government will give you up to $400 for every $2,000 you contribute to your child’s RESP per year). When your children are ready to attend post-secondary education, withdrawals are taxed in their hands. Given that they likely have little to no income, they will pay very little, if any taxes on withdrawal.
- Spousal loan – Low interest rates means more borrowing and lending. This isn’t just good news for banks and home buyers. Spouses can lend to one another to save on taxes. The higher income spouse can provide an interest-bearing loan to the lower income spouse. The lower income spouse would use this loan to invest. All income earned on these investments would be reported by the lower income spouse. The spousal loan must charge interest at the CRA’s “prescribed rate,” which is currently 1%. The 1% interest which must be paid by the lower income spouse by January 30th of the following year will be reported as income by the higher income spouse and as an expense by the lower income spouse. Provided the investment returns are greater than 1%, tax savings are achieved.
- Donate to Charity – Annual donations claimed over $200 receive a much bigger tax break than the first $200. Instead of cash, consider donating eligible Canadian securities such as shares in a public company, you receive a tax credit for the fair market value of the investment on the day it was donated and avoid any capital gains tax. Alternatively, used dental equipment can also be donated for which you would receive a tax receipt and break.”
- Tax breaks for employers and employees – Take your staff out at the end of the year for a meal. Normally only 50% of meals are tax deductible, however up to 6 staff meals are 100% deductible each year provided all staff members are invited. After the meal, take your staff out shopping. Each employee can receive up to two non-cash gifts valued at $500 tax-free in total. You get the tax deduction and they get the gifts tax free. Compared to a year-end bonus which is taxed in the employee’s hands, the non-cash gifts reduce their tax burden and re-energizes them for another productive year.
- Enroll your children in winter activities – Skating, skiing, snowboarding or snow shoeing during the winter allows your kids to get fit while reducing your taxes. You can receive a tax credit of up to $1,000 (Ontario credit remains at $500+) per child when you enroll them in a fitness or cultural activity.
- Time your investments transactions – If you have a large capital gain from the sale of investments, consider selling stocks that are in loss positions earlier in the year. You trigger a capital loss by selling which can offset the taxes from earlier gains. You can repurchase those stocks after 30 days if you still want them as part of your portfolio. If you are looking to cash out your investments which have appreciated, do so in the New Year instead of December. You delay reporting any gains on the sale for a full year just by waiting a few days. This will provide you some room when publicly traded shares are involved. The settlement date is the date when the shares are deemed to be sold for tax purposes and the settlement date is usually after the date when you have placed your order to sell your shares.