|Qualifying Pension Amount
||Applicable Tax Rate
||Qualifying Pension Amount
||Applicable Tax Rate
||Combined Annual Savings if Doubled (i.e. Spouse has Credit too)|
The credit for an individual on the first $2000 of RRIF income would be worth $435 as calculated above. So, for example, transferring $14,000 to a RRIF at age 65 and initiating income of $2,000 per year for the seven years before RRIF withdrawals are technically required, would save $3,045 in tax on that income. This strategy is not for everyone. The payments will bump up an individual’s income level and may affect your OAS and other government benefits. If the strategy is implemented it is recommended that the $2000 RRIF payment be transferred in-kind to a TFSA to continue its tax deferred growth. Ultimately, you need to be aware of the consequences to your retirement savings if the payments are spent rather than reinvested.
Prescribed Loans – At time of writing, CRA’s prescribed rate still remains relatively low at 2% annually, a tax-planning and income splitting strategy that may be appropriate is to loan money for investment purposes to a spouse or family member. In the case where loans are made at the CRA-prescribed interest rate and in compliance with CRA’s guidelines, the attribution rules that would normally be in affect are not applied, and the income earned will not attribute back to the lending taxpayer. If the loan is in place by December 31st, the loan will stay at the 2% rate even if interest rates rise. However, individuals who have existing prescribed rate loans should be warned that they cannot simply change the rate or repay the loan with a new loan at the current prescribed rate.
Charitable Donations – To be eligible to receive a tax credit for the 2013 tax year charitable donations must be made by December 31st, 2013. However, you do not have to claim all of the donations you made this year on your current-year return. You can carry forward any donations you do not claim and claim them on your return for any of the next five years. Keep in mind that you have to claim tax credits for gifts you carried forward from a previous year before you claim tax credits for gifts in the current year.
On the first $200 the federal tax credit is 15% and provincial credit is 10%, and for amounts over $200, the federal credit is 29% and the provincial credit is 21%. For example on a $10,000 donation:
In addition, for tax years 2013 to 2017 there is a first time donor credit available to an individual if there was no donation credit claimed in any of the 5 preceding tax years by that individual or their spouse. This “First time Donor’s Super-Credit” provides an additional 25% to the rates used in the calculation on the first $1,000 of the donation.
“In-Kind” Donation of Securities - If a taxpayer donates publicly listed securities, and assuming the charity allows for the donation in-kind, not only can the donor claim the full value of the securities for the donation tax credit, in addition, any gain on the donated securities is not considered a taxable capital gain and will not be included in taxable income. The donation would have to be made by December 31st to qualify for the 2013 tax year. As these transactions can take some time, the process should already be getting started to ensure the charity is able to issue the receipt by the end of the year. Most charities will have a donation form available; otherwise ATB Securities Form 220 “Charitable Donation of Securities in-kind” has been created for this purpose.
Interest Payments – Generally most interest you pay on money you borrow for investment purposes is tax deductible. This applies as long as the proceeds are used to earn investment income, including interest and dividends. To be deductible for 2013 the interest expenses must be paid by December 31st and will be claimed on Line 221 of the General Tax return. However, be aware that you cannot deduct interest paid on money borrowed to invest in RRSP’s, RESP’s, RDSP’s or TFSA’s.
Tax Loss Selling – Selling an investment for a capital loss, often referred to as “Tax Loss Selling”, is a tax strategy that can be used to minimize capital gains. In order to realize losses for the end of the year trades must generally be made on or before December 24th otherwise, the trade will not settle until 2014 and the loss won’t be available until next year.
Tax loss selling only applies to investments held outside of registered plans (i.e. not RRSP’s, TFSA’s etc.). The investments can include mutual funds, stocks and other property such as a family cottages or a rental property (but does not include a personal residence). Investments should not be sold just to trigger a tax-loss. Selling securities at a loss should only be done as part of an overall investment plan and if you no longer have a reason to hold that particular security.
When an investment is sold at a lost, 50% of this capital loss (the “allowable capital loss”) will offset taxable capital gains that you earned in the same year. Capital losses can only be used to offset capital gains, not to reduce other income. If you have no capital gains in the current year, or your allowable capital losses in the current year exceed your taxable capital gains, the remaining capital loss is known as a “net capital loss”. You can carry a net capital loss back and apply it against taxable capital gains realized in any of the three previous years. A net capital loss realized in 2013 could be applied against taxable capital gains realized in 2010, 2011 & 2012. The net capital loss can also be carried forward indefinitely to be used against future taxable capital gains.
However, the “Superficial Loss” rules will be applied if the loss is considered "superficial". Generally speaking, a capital loss will be defined as "superficial" if, during the thirty days on either side of the date of sale, the taxpayer (or an affiliated person) purchased that same property, or one that is deemed to be identical. If this is the case the loss cannot be used to offset capital gains, but rather, it will be added to the adjusted cost base of the substituted property. This will either decrease a capital gain or increase the capital loss when the substituted property is sold. In the case of a transfer-in-kind to a TFSA or RRSP, any loss would also be considered superficial and would not be available to offset capital gains.
Reduce withholding tax at source – As much as getting a tax refund can feel like a windfall, in essence it means you have paid the CRA too much tax throughout the year. You have essentially given the government an interest-free loan. Individuals should consider completing and submitting CRA Form T1213 to CRA. Once approved, this will allow the employer to reduce the amount of tax withheld at source by taking into account deductions such as RRSP contributions and child care expenses. Link to the form is attached.
The information provided is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. This is intended as guidance only, for a qualified opinion please contact a tax professional.