Year-end tax-shrinking tips

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   By Guest Blogger Ryan Lewenza

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It’s time to start getting ready for tax season again. Yippee! If you’re like me, getting everything organized to file your taxes feels like performing a self-inflicted frontal lobotomy using a dull butter knife. I can think of a million other lousy things I would prefer to do, like watching an episode of The Bachelorette with my wife, where coincidently many of the contestants have also had a frontal lobotomy, than compile all the required tax slips and documentation to file my taxes.

Now that I’ve ruined your morning with the reminder of tax season approaching and your rage/PTSD is bubbling to the surface, I’ll move on to providing some tips that will help reduce your tax bill and your palpable anger. So here it goes.

1. Review and max out registered accounts. First review your RRSP, TFSA and RESP accounts before the end of year to ensure you didn’t over-contributed. Over-contributing to these accounts can result in penalties and is a big hassle to fix. After confirming this, you should consider maxing out these retirement and education accounts to take advantage of tax-deferred growth. If you’re like me and hate sending the Feds more money than needed, then this is a good way to reduce your tax bill and build up your retirement funds.

2. Review your capital gains/losses and consider triggering some gains in your cash account ahead of potential tax changes. As we approach December 31st you should be reviewing your year-to-date capital gains and look to offset some of these gains by triggering losses. Known as tax-loss selling, you could sell investments that are down from their initial cost price and apply those losses to your accumulated gains, thus reducing your tax bill. Moreover, with the high government deficits and accumulated debt from the Covid-induced recession, some are speculating that the Federal government could increase the capital gains inclusion rate next year. We’ve fielded numerous calls from clients this year on this topic and we have, through our normal day-to-day active management of client portfolios, triggered some significant gains for clients this year so we’ve already started to do this. However, since it’s no slam-dunk that the Feds will follow through with this, we have not traded the entire portfolio to trigger all the gains this year. Instead, we’ve taken a ‘middle of the road approach’ by triggering some gains as we’ve re-positioned the portfolio for more growth.

3. Consider a spousal loan. There are few opportunities to split income between partners so one easy strategy to do this is by loaning funds to the lower-income earning spouse. Garth writes a lot about this strategy so readers should be well versed on this. Basically the high-income earning spouse lends money at a ‘prescribed rate’, which currently is set at 1% by the CRA, to the low-income spouse. The lower income spouse then invests the funds and if the returns are above the 1% lending rate, then you have effectively shifted the income and gains earned to the lower income spouse, which is taxed at a lower rate. To complete this strategy documentation of the loan must be kept and the borrowing spouse must pay the interest on the loan by January 30th in the year following the beginning of the loan.

4. Collect all receipts/statements of expenses that can be written off. This would include things like investment management fees and home office expenses. For investors who pay investment management fees, they can write off the portion of management fees that are charged in the non-registered or cash account. You cannot write off any investment fees that were charged in registered accounts. With the pandemic and many of us working from home, some employees will be able to write off a portion of the costs incurred while working from home. This includes things like internet charges, the purchase of home office equipment and a portion of insurance and utility expenses. You may want to talk to your employer about this as you will likely need the Form T2200 to deduct these home expenses.

5. Seniors should consider withdrawing funds in a low-income year and base RRIF withdrawals on younger spouse’s age. In any particular year when your income is low then it makes sense to withdraw funds from RRSPs or RRIFs even if you don’t need the funds as you’ll be taxed at a lower rate. When setting RRIF withdrawal rates use the younger spouse’s age as this will lower the required minimum annual amount and further defer taxes.

6. Make a charitable donation and claim the tax write-off. Covid-19 has had a terrible toll on many people, the poor and less advantaged disproportionately so. This is why, now, more than ever we should be giving back to those less fortunate than ourselves. The Turner Investments team is currently in the midst of our year-end charitable giving campaign and we plan to do even more than in past years given the need. And it feels pretty good! You can make a donation by cash/credit card or donating eligible securities. You could consider donating securities with a capital gain since the government forgoes the capital gain and taxes on security donations.

Finally, below is a list of important tax dates for individuals and business owners. This, combined with some of the tax tips outlined above should get you more than halfway to completing your taxes this year. And no H&R Block cost of $69. Bonus!

Important Tax Dates to Remember

Source: Raymond James Ltd. (Click to enlarge)

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.