As we all anticipate putting 2020 behind us and starting fresh in the new year, here are some year-end tax tips to consider that may help to lighten your tax bill.
Tax Loss Selling
The last day for tax loss selling this year is December 29, 2020.
Investors should consider selling stocks or bonds before Dec. 29 if doing so will generate a taxable loss, as these losses can be used to offset capital gains (note that this advice only applies to non-registered accounts as gains realized in registered accounts are not taxable). Such tax loss ‘harvesting’ can be a useful tool for minimizing tax burdens as realized losses for the year can applied against realized gains from 2020 or prior years to reduce taxes owing. If you have no current or past gains to apply losses against, you can also carry them forward to offset future gains.
Bridgeport consistently makes use of tax loss selling within its pooled funds by strategically selling individual investments within the funds to reduce any taxable income that ends up on investor tax slips distributed at the end of the year. This helps to reduce taxes paid by our clients.
Of course, investors always need to be aware of the CRA’s ‘superficial loss rule’. If a security is sold at a loss and subsequently repurchased in the following 30 days, the loss will be considered void and may not be used to offset gains.
Further, investors are cautioned not to “let the tax tail wag the investment dog”. Even the highest quality investments suffer setbacks, sometimes tempting investors to focus on the short term when realizing tax losses. Worthy investments can and do rebound quickly and the motivation to realize losses should be carefully weighed against the prospects for the investment.
Registered Retirement Savings Plans (RRSPs) and Registered Income Funds (RIFs)
You need to contribute to your RRSP by March 1, 2021 to obtain a tax deduction on your 2020 tax return and reduce your taxes payable.
Investors turning 71 this year should be also be aware that they are required to convert their RRSP to a RRIF. Even so, a final RRSP contribution this year is allowed. Please feel free to reach if you’d like discuss the relative merits of making a final RRSP contribution.
Tax Free Savings Accounts (TFSAs)
As of January 1, 2020, all Canadian residents 18 years of age or older gained an additional $6,000 worth of TFSA contribution room. Unused TFSA contribution room accrues and carries forward to future years. The cumulative contribution room available to any Canadian resident who was 18 or older in 2009 (the year TFSAs were introduced) is now $69,500.
In most cases, we recommend maximizing TFSA contributions to take advantage of earning tax free investment returns, especially since TFSA withdrawals can be made without restriction or penalty at any time. Remember though, if funds are withdrawn from a TFSA, such funds may only be recontributed in future calendar years (not in the same year).
Registered Education Savings Plans (RESPs)
The last day to make an RESP contribution is December 31, 2020.
RESPs do not have an annual contribution limit, but the lifetime contribution limit for any one RESP beneficiary is $50,000.
To maximize the Canadian Education Savings Grant (CESG), RESP account holders should contribute $2,500 annually to the RESP for each beneficiary. This will earn the maximum $500 CESG — 20% of the contribution.
If ‘catch-up’ contributions are needed, RESP account holders may contribute an extra $2,500 per year, per beneficiary, to capture one year’s worth of missed CESG ($500). So if you have fallen behind on making RESP contributions, you should consider making two years’ worth of RESP contributions ($5,000 per child) before the end of 2020.
The last day to make a charitable contribution is December 31, 2020.
Consider donating stocks with large capital gains to charity. In so doing, you will avoid paying tax on the gain. Further, you can deduct the full fair market value of the stock you donated from your income.
As paperwork and inter-dealer transfers are involved, investors considering donating stock are encouraged to begin the process ASAP. You should also check here to ensure the charity has been properly registered with the CRA.
Spousal loans enable a high income spouse to shift income to his/her lower income spouse, thereby reducing total taxes paid. As a result of lower interest rate levels in the wake of the pandemic, spouses may lend at a 1% rate (read our 2018 analysis of the potential benefits of making a spousal loan here). In the example provided, if the loan were outstanding for ten years, a couple implementing this strategy could potentially save $198,000 in taxes over the term of the loan. Be sure to consult with your tax advisor and portfolio manager to discuss the merits of arranging for a spousal loan.