It’s not too late to help your client with tax-efficient planning for 2019.
If you ask Jamie Golombek, managing director of tax and estate planning at CIBC Financial Planning and Advice, there are plenty of tax tips to share with your clients before year-end so they can benefit from tax savings.
Tax-loss selling tops his list.
“If you’ve got investments that have gone down and they’re sitting in an accrued loss before the end of the year, now might be a good time to consider selling,” Golombek said during a Nov. 7 interview. Net capital losses can be used against net capital gains in the current tax year, carried back up to three calendar years or carried forward indefinitely to offset net capital gains in other years.
For a client’s loss to be available for 2019 or for one of the prior three years, the settlement must take place in 2019. Thus, any trades must meet the Dec. 27 deadline to ensure they settle by Dec. 31.
Another consideration with tax-loss selling is foreign exchange.
For example, if a client has U.S.-dollar shares, “make sure that what looks like a loss isn’t actually a gain, because of the positive movement in the foreign exchange,” Golombek says.
Any potential U.S.-dollar proceeds from selling the shares must be converted into Canadian dollars and compared with the original purchase amount (in Canadian dollars on the purchase date) to assess whether your client has a gain or loss.
Clients must also be mindful of the superficial loss rules if they plan to repurchase a security sold at a loss.
“If you buy back the security within 30 days [before or after the sale date], then that loss is denied and added to the ACB, the cost base of the shares,” Golombek says.
The rules also apply if the security is bought back by the client’s spouse/partner, a corporation controlled by the client or client’s spouse/partner, or a trust of which the client or client’s spouse/partner is a majority beneficiary (such as an RRSP or TFSA).
Another year-end tax tip for investors to consider is making a charitable gift in 2019 by donating securities, including mutual funds and segregated funds, with accrued capital gains.
“Not only will [the investor] get a tax receipt equal to the fair market value of that gift, but [they’ll] pay no capital gains tax whatsoever on the value of the shares being donated in-kind to a registered charity,” Golombek says.
Other timely tax reminders for investors
For a client planning to make RRSP withdrawals under the home buyers’ or lifelong learning plans, a withdrawal in January might be a better course of action than a withdrawal in December.
“That’ll give you an extra year before you have to start paying back the withdrawals under those particular plans,” Golombek says. The home buyers’ plan allows RRSP withdrawals up to $35,000 for first-time buyers; the lifelong learning plan, up to $20,000 for post-secondary education. Funds must be repaid in annual instalments.
In contrast, a planned TFSA withdrawal might be preferable in December than in January.
“By taking money out of a TFSA in December, that gives you all of 2020 to recontribute the TFSA [amount] that you’ve just withdrawn, should you have the cash to do so,” Golombek says.
He also reminds investors that certain expenses must be paid by year-end to claim a tax deduction or credit in 2019, including interest paid on money borrowed and investment counselling fees for non-registered accounts.
Also, if a client turned 71 in 2019, they must make final contributions to their RRSP by year-end before converting it to an RRIF or registered annuity. “December 31 is the final day to do it,” Golombek says. “You’ve got to make any RRSP contributions by that time; you don’t have until the normal March 1 deadline to do so.”
Tips for students, home renovators
For clients with training costs not covered by an employer, the new year brings the new refundable Canada training credit.
For those aged 25 to 65 who have employment income between $10,000 and $147,667 in 2019, $250 is added to a notional Canada training credit account in 2019. In 2020, clients can claim 50% of their eligible tuition and fees, up to the account balance of $250, to offset personal tax otherwise payable. As such, clients should consider putting off training costs until the new year.
“To the extent that you can defer paying those costs until January 2020, you might be head of the game,” Golombek says.
He also offered a reminder about RESPs and Canada Education Savings Grants (CESGs). The grants are provided by the government and are equal to 20% of the first $2,500 in annual RESP contributions, or $500 annually, per child. CESG room is carried forward to the year the beneficiary turns 17, but there are situations where it may be beneficial to make an RESP contribution by Dec. 31.
For example, if a client’s child or grandchild turned 15 in 2019 and has never been an RESP beneficiary, no grant can be claimed in future years unless $2,000 is contributed to an RESP by year-end. Making the contribution allows the client to receive this year’s grant and also creates CESG eligibility for 2020 and 2021, Golombek says.
In a November report, he describes another situation when it’s beneficial to make an RESP contribution by Dec. 31. If there are less than seven years before your client’s child or grandchild turns 17 and the client hasn’t maximized RESP contributions, they should consider contributing by Dec. 31, Golombek explains.
That’s because each beneficiary with unused CESG carry-forward room can receive up to $1,000 of CESGs annually (instead of up to $500), with a $7,200 lifetime limit, up to and including the year in which the beneficiary turns 17.
“If enhanced catch-up contributions of $5,000 (i.e., $2,500 × 2) are made for just over seven years, the maximum total CESGs of $7,200 will be obtained,” Golombek said in the report.
Seniors and those eligible for the disability tax credit can get help paying for certain renovations with the home accessibility tax credit.
Specifically, these clients can claim a non-refundable 15% credit on up to $10,000 of expenses per year toward renovations that allow them to be more mobile or functional within their homes or that reduce risk of harm within their homes or when entering their homes.
“You might want to pay some expenses by December 31 for any work or goods acquired in 2019,” Golombek says, adding that the amount could also qualify for the medical expense tax credit.
A final tip: Tax rate changes
Finally, clients can assess any changes in their income tax rates.
“You might want to take into account your tax rate in 2019 versus your tax rate in 2020 to determine whether there’s some planning opportunity to have […] income taxed in a lower tax year,” Golombek says.
For example, a client’s tax rate could increase in 2020 if they plan to return to work or expect to receive deferred compensation or exercise stock options.
As such, your client “may wish to realize income in 2019 by taking steps such as selling investments with a capital gain, exercising stock options or taking bonuses in 2019 rather than 2020, where feasible,” Golombek says in the report. “It may also make sense to defer deductible expenses until 2020 where possible.”
For more details, including ideas for business owners, see Golombek’s report on 2019 year-end tax tips.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.