The end of the calendar year brings with it many to-dos.
So Jamie Golombek, managing director of Tax and Estate Planning at CIBC Wealth Advisory Services, wants to ensure you remember to help clients save tax. Here are five tips.
Tip #1: Consider tax-loss selling
With this year’s rocky markets, it’s likely your clients have incurred losses on certain securities. “It [may] make sense from a tax perspective to sell, because you want to use that loss to offset other capital gains you’ve realized this year,” or in the previous three years, says Golombek.
But tell clients there are catches: “If you try to buy back that security within 30 days, you have a superficial loss. [That means] your loss is denied and gets added to your cost base, and you’d have to wait to use it until you ultimately sold the security.” As well, “you can’t simply get that loss by transferring it in kind to an RRSP or TFSA.”
The 2015 tax-loss selling deadline is December 24, 2015.
Read: Tax loss selling: Using Canadian-listed ETFs to defer taxes on capital gains
Tip #2: Use the 1% prescribed rate loan for income splitting
The CRA’s prescribed interest rate for family loans will remain 1% until December 31.
This opens up opportunities. “The general rule in the Income Tax Act is that you are not permitted to do income splitting because the attribution rules attribute income or capital gains back to the person who originally tried to, say, make a gift,” says Golombek. “The exception is if you make a loan using the prescribed rate.”
He says a client can loan money to her spouse or children at the prescribed rate of 1%. Any gains above 1% will be taxed in the hands of the lower-income spouse or child, saving your client tax. To avoid income or gains attribution back to the client, the spouse or child must pay 1% interest to her by January 30 of the following year (and she must report that interest as income).
But act soon: “The beauty of entering into this strategy before December 31 is that you can lock in the rate for the duration of the loan. So even though interest rates are expected to rise over the next number of years, if you lock in a 1% rate now, you can use it indefinitely.” To facilitate that, he adds, the loan could be payable on demand.
Tip #3: Convert RRSPs to RRIFs by age 71
If clients turned 71 in 2015, they must convert their RRSPs to either RRIFs or registered annuities by the end of the year.
Remind such clients to take full advantage of the RRSP before year-end by making their contributions. “You don’t have the normal 60 days [after year-end] that you do have in every other RRSP season to get that contribution in there,” says Golombek.
If your 71-year-old client has earned income in 2015 that would’ve allowed her to have contribution room next year, “you might want to make a one-time over-contribution in December, pay a small penalty tax for December, and then deduct that contribution going forward in 2016.” But such measures may not be necessary, he says, “if you have a spouse or partner that’s under the age of 71.”
Tip #4: Keep RRIFs tax-sheltered
The 2015 budget lowered the prescribed minimum amounts that clients must take out of RRIFs by approximately 30%. “What this means is that you can now keep more money tax-sheltered for longer if you’ve taken out more than the new minimum,” says Golombek. “You can actually recontribute [that] amount until the end of February and get a tax deduction in your 2015 return.”
Tip #5: Make payments by Dec. 31
Several deductions and credits rely on payments made between January 1 and December 31 of each year.
Golombek highlights charitable donations as an example. “Keep in mind that you have the ability to [donate] securities in kind, [such as] mutual funds and stocks that have gone up in value, because not only do you get a receipt, but you also pay no tax on the accrued capital gain.”
Other types of expenses that need to be paid by year-end include medical expenses, interest on money borrowed for the purpose of investing in non-registered accounts, and certain investment counseling fees.