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Evelyn Jacks: Year-end tax-planning Checklist

December 20, 2011

Want to start 2012 on a sound financial footing? Your family's tax returns are a great place to look for year-end tax-planning opportunities. Following are seven tax tips to discuss with your tax and financial advisors before the year end that may yield you gold:

  1. Recover taxes owing from prior years. Sometimes, individuals put off filing their income tax returns because they think they owe money. In fact, the tax department may owe them. (It's always nice when that happens!) So, if you're a delinquent filer, get caught up — and remember, by filing a return, you create RRSP contribution room as well as capital loss carry forward or carry back opportunities.

Or, you may have filed your returns but missed an important tax-saving provision. Tax refunds resulting from errors and omissions may be recovered for up to 10 years. So, if you're in this later category, refile your returns; if one of those missed opportunities is for 2001, be sure to adjust your tax returns by December 31, before the time runs out. After all, it is your legal right to arrange affairs within the framework of the law to pay the least income taxes possible.

  1. Don't overpay your quarterly instalments. If you pay your income taxes in quarterly instalments, you had an instalment due on December 15 or, in the case of farmers, it is due December 31. If you haven't yet paid, be sure to calculate your estimated income for the current tax year first. If your 2011 income is lower than in past years, you may be able to reduce that payment or not make it at all. To use the optional "current year” or "prior year” methods of calculating your instalments, check out the Canada Revenue Agency's publication P110 Paying Your Income Taxes by Installment. This is a nice way to create new capital for investment purposes or that much needed vacation!
  1. Compute your family RRSP advantage: Most Canadians do not maximize the opportunity to contribute to their RRSPs and that's a shame for a number of reasons. One important consideration: a RRSP deduction reduces net income — that line on your tax return upon which refundable and non-refundable tax credits are based. Lower net income increases those credits and, therefore, cash flow, leaving more money for investment opportunities. Contributing to an RRSP can truly save you a lot of money and, taken on a family basis, can boost your family net income.

So, plan now to contribute to an RRSP for each family member who has contribution room. (Check last year's Notice of Assessment for this figure.) RRSPs are also important planning tools for couples wanting to split retirement income under a spousal plan. If cash is scarce this time of year, consider moving assets you have in a non-registered account into a RRSP. Talk to your tax and financial advisors about superficial loss rules and how they may apply.

  1. Consider tax-loss selling activity. Year end is a good time to consider selling losers in your portfolio to offset the winners. Capital losses generated by the sale or transfer of stocks and bonds in a non-registered portfolio before year end will offset capital gains incurred this year. Unused losses can be carried back three years to offset capital gains you reported in any of those years — a great way to reach back and recover taxes previously paid. Or, you can carry unused capital losses forward indefinitely — an important way to manage taxes on your next winning investment.
  1. Split income and transfer assets. Today's low interest rates make it opportune to borrow money to increase your investment portfolio. Interest on your loan is tax-deductible provided there is a reasonable expectation that your investment will generate income — interest, dividends, rents or royalties — in the future. (Note: capital appreciation is not considered income from investment.) For family income-splitting purposes, a spouse can lend money to a lower-income spouse to enable the reporting of investment income in that person's hands. Just draw up a bona fide loan and charge your spouse the interest rate prescribed by Canada Revenue Agency. Your spouse, however, must actually pay you the interest by January 30 following each taxation year and you must, of course, report the interest on your tax return.
  1. A TFSA is a must. Give your adult children a valuable Christmas gift: open a Tax-Free Savings Account and make sure you and/or they maximize the opportunity to put up to $5,000 in it each year. The earnings that accumulate in the account are tax free and using this valuable savings room can build family millionaires.
  1. Donate securities. Capital gains can be avoided entirely when qualifying securities with accrued gains are transferred to your favorite charity before year end. A receipt for the donation will also offset taxes payable. That's a win-win and worth a portfolio review.

Other tax saving tips to consider and discuss with your advisor before year end include:

  • maximizing medical expenses,
  • annualizing taxes on bonus payments,
  • buying a car or computer before year end to maximize capital cost allowance deductions,
  • finalizing the auto log for 2011, then qualifying for " logging” only three months next year,
  • moving before year end if your new job or business is in a province with a lower tax rate,
  • avoiding clawbacks on Old Age Security and refundable tax credits with net income planning,
  • avoiding promotional expense claim restrictions for rookie commissioned-sales reps,
  • planning for early retirement with new CPP changes starting in 2012,
  • sorting receipts early: this year, be on time and be audit-proof.

It's your money, your life. A tax-wise investor becomes wealthier over the long run regardless of the economic cycle. Most people leave tax savings on the table. Maximize your potential to reduce your after-tax income before year end!

Evelyn Jacks, a best-selling Canadian author of 48 books including Essential Tax Facts 2012, is the Founder and President of The Knowledge Bureau, a national educational institute focused on Real Wealth Management™. Learn tax preparation and tax-efficient retirement income planning: see

ADDITIONAL EDUCATIONAL RESOURCE: Distinguished Advisor Workshop - Annual T1 Update