With the New Year fast approaching, now is a good time to consider ways to improve your tax position. There are still many time-sensitive issues that you should address before January 1 and in early 2015 that can help take a bite out of your 2014 personal income taxes.
- Contribute to an RSP as early as possible, or make monthly contributions and dollar cost average your investment purchases. The more time your money has to grow in a tax sheltered environment, the larger your retirement nest egg will be. The maximum contribution for 2014 is $24,270 (deadline March 2, 2015) and for 2015 it is $24,930. Check your Notice of Assessment for your contributions limits.
- Contribute to a Spousal RSP to split income. Even with the new income splitting rules, Spousal RSPs still make sense as there is no age restriction as to when income can be taken out of the lower income spouse’s plan to shift taxable income. Don’t forget the three year attribution rule though.
- If you make RSP contributions, have child care expenses, interest expenses, alimony, maintenance, charitable donations or rental losses, you can reduce tax withheld at source by submitting a Request to Reduce Tax Deductions at Source to Canada Revenue Agency. If approved, CRA will authorize your employer to deduct less tax from your pay, so you don’t have to wait for a refund of the tax you’ve overpaid throughout the year.
Tax Free Savings Account (TFSA) Limits
Contribute to a TFSA (or transfer existing investments from a taxable account). While contributions are not tax deductible, your earnings grow tax free and will accumulate faster. The maximum contribution for each of 2014 and 2015 is $5500 per year. Past contribution room accumulates, so as of December 31, 2014 you could have up to $31,000, plus earnings. If you withdraw money from your TFSA during the year, you must wait until the following calendar year to re-contribute the money, or be subject to penalty. As well, if you transfer existing investments be aware that you might trigger a capital gain.
RESP – Take advantage of the Canada Education Savings Grant
If you have not already started a Registered Education Savings Plan for your children or grandchildren’s education, and you want to take advantage of the government’s 20% matching CESG grants, you must do so before December 31st of the year the child reaches age 15. Grants are retroactive, so don’t miss this great opportunity to help with post-secondary education expenses.
Retirement planning – Is it time to wind up your RSP?
If you turned 71 years old this year, you must convert your RSP to a RIF (or annuity) before year end. However, if you have earned income in 2014, you’ll have RSP room next year, but no RSP. Consider making your next year’s contribution in December, just before you convert your RSP. You’ll pay a 1% penalty for the over contribution for one month, but as of January 1st, your over contribution disappears, and you can deduct your contribution on your 2015 tax return.
If you have earned income or unused RSP contribution room and are over the age of 71, you can still contribute to a Spousal RSP until the end of the year your spouse turns 71.
Pension income tax credit – Don’t miss out!
Take advantage of the pension income tax credit. If you don’t have $2000 or more from a private pension plan, at age 65 convert enough of your RSP to a RIF to generate the $2000 eligible income, or buy a non-registered GIC from an insurance company, as the interest is also eligible for the credit.
Your investments – Have you considered tax loss selling?
If you own investments with unrealized losses, considering selling them before year-end to realize the loss and apply it against your capital gains realized during the year or in the three prior years. Make sure you don’t run afoul of the special tax rules including those designed to stop the artificial creation of tax losses. The last day for tax loss selling is December 24, 2014.
Is your portfolio tax efficient?
Review the tax efficiency of your portfolio. What type of income are you earning on your non registered investments? Consider investments which defer tax, or convert interest income to capital gains. This will not only reduce your income tax, but may also increase your government entitlements.
Donation of securities
Donate securities to a charity before year end and get a tax credit and savings. Special government incentives have eliminated the capital gains taxes otherwise payable if you gift certain publicly traded securities directly to a charity. Don’t forget that married and common law couples can pool their donations to maximize tax credits.