There’s still time to help your client with tax-efficient planning for 2021.
This year may require some unique consideration, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, in a recent interview.
The good news, said Golombek, is that anyone invested in equity markets has done very well and has likely seen “massive gains” in their portfolio.
That may leave some wondering if it’s a good time to do some year-end portfolio rebalancing.
“I’m suggesting that primarily because of the uncertainty that we still have on whether or not the government would increase the capital gains inclusion rate,” he said.
The Liberal government hasn’t indicated any plans to change capital gains rules. However, the NDP campaigned to raise the capital gains inclusion rate from 50% to 75%, leading some to speculate that the Liberals could adopt the policy to secure NDP support in Parliament.
“Maybe now is the time to rebalance a portfolio sooner rather than later, taking those gains and then getting back on track with your investment policy statement,” Golombek said.
Year-end tax-loss selling may also make sense, Golombek said, “because if you are rebalancing that portfolio in 2021, maybe you also want to realize some potential capital losses and then offset those against those capital gains on the portfolio rebalancing.”
It’s also the season for year-end donation planning. Clients may want to consider donating some of the biggest winners in a portfolio to a registered charity. Others may want to set up a donor-advised fund, “which allows you to contribute in kind, pay no capital gains tax on the accrued gain of the stocks or mutual funds in your portfolio, and still get a receipt for the fair market value of the amounts being donated,” he said.
Golombek also highlighted his standard year-end tax tips, such as making sure to pay certain expenses by year-end. Investment-related expenses, such as interest on money borrowed for investment purposes, or investment counselling fees that are deductible for non-registered accounts, need to be paid by Dec. 31 to get the deduction for the 2021 tax year.
Clients who turned 71 in 2021 also only have until year-end to make final contributions to their RRSPs before converting them to RRIFs or annuities.
In addition, the prescribed rate for spousal loans has been fixed to 1% until the end of the year, said Golombek. With regards to children, Golombek said to look out for options or certain limitations in contributing to registered education savings plans (RESPs).
If a client has been on maternity leave this year and their income is going to go back up next year, “maybe this is the year to realize capital gains,” he said.
For business owners, Golombek said to look at total compensation, salary versus dividends, at the end of the year. It is important a client is paying themself enough salary to be able to make the maximum registered retirement savings plan (RRSP) contribution the following year.
The contribution limit on RRSPs is 18%, “so effectively 2021 means you have to pay yourself a salary of at least $162,000 to be able to get the maximum RRSP contribution next year of $29,210.”
Also, the opportunity to leave money in the corporation or enjoy tax deferrals are all things to consider before Dec. 31.
Finally, clients can assess any changes in their income tax rates.
“If you think your tax rate is going to be higher this year than it will be next year, maybe you want to defer income to the following year and vice versa,” he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.