Year-end financial planning tips you won’t want to ignore

Fall 2011

Top up TFSAs

Introduced in 2009, Tax-Free Saving Accounts (TFSAs) give every Canadian resident age 18 and older the opportunity to invest $5,000 per year tax-free. By 2011, a couple could save $30,000 and not pay any tax on the investment earnings! Top up TFSAs now and then make your 2012 contribution of $5,000 on January1^st. Students, who are 18 or older, can withdraw $5,000 from their RESP each year and contribute the money to a TFSA. The funds grow tax-free and can be used for any purpose in the future.

Crystallize Capital Losses

Do you have some shares that would produce a capital loss if they were sold before the end of the year? Even if you want to hold onto these shares, consider selling them to crystallize the loss for tax purposes (you can repurchase the shares after 30 days). Capital losses can be applied against gains reported in the previous three years or carried forward indefinitely. You will need at least three business days to settle the trade, so don’t wait until the last minute.

Make charitable donations before December 31^st

Make all of your planned charitable donations before December 31^st in order to maximize your 2011 tax credit, as the more you give, the bigger the tax credit you can claim (maximum donation is 75% of your annual net income). The first $200 in eligible donations gets a 15% federal tax credit and anything more gets a federal tax credit of 29%*. If you give online, you can usually donate right up to December 31^st and get a tax receipt for the 2011 tax year. When donating by mail, be sure to do it earlier.

If you have shares with unrealized capital gains, eliminate the tax liability by donating the shares in-kind to your favourite cause. There’s no tax on capital gains associated with shares given to charity and the maximum donation is up to 100% of your net income. *Provincial amounts vary.

Age 60 this year? Evaluate taking CPP now

The discount applied to taking Canada Pension Plan (CPP) benefits before age 65 starts to increase in 2012. If you wait to decide to take CPP benefits until next year and you are under 65, you will receive less for the rest of your life than if you commenced CPP benefits this year. Similar changes are coming to the Quebec Pension Plan (QPP) with higher discounts commencing in 2014.

Prepay expenses eligible for tax credits

There are plenty of tax credits to capitalize on from children’s activities and transit expenses to tuition costs and medical expenses. Arrange to prepay some of these before the end of the year to claim a bigger credit. New for the 2011 tax year are credits for examination cost (over $100), tuition credits when a student attends post-secondary studies abroad for a minimum of three weeks, art classes for children under age 16 (up to $500, amount doubled if the child is disabled) and there is now no upper limit on medical expenses for a dependent over the age of 18. Be sure to time the purchase of a first house before December 31^st to get the Home Buyers’ Tax Credit of $5,000. As always, make sure you collect receipts to back up any claims.

Maximize the effectiveness of RESPs

If you are investing in a Registered Education Savings Plan (RESP) to save for a child’s education, make sure you take full advantage of government grants and tax-deferred growth by earning the maximum grants each year. An annual contribution of $2,500 per eligible child will result in $500 in grants from the federal government, possibly more depending on family income and province of residence. If your child turned 17 in 2011, and you have been making RESP contributions for them all along, this is the final year for earning government grants.

Age 71 this year? Convert RRSPs to an income option

Your Registered Retirement Savings Plan (RRSP) must be converted into an income option, such as a Registered Retirement Income Fund (RRIF) or annuity, by December 31^st in the year you celebrate your 71^st birthday. When setting up a RRIF, consider electing to base the payments on the age of your spouse, if younger, to maximize tax deferral. If you are still working, make a final contribution to your RRSP before you convert.