What's on your to-do list before year-end? At my house, we talked about this over dinner last weekend. My son, Win, turned 16 recently and so driving as much as possible is on his list. I'm not sure he's really ready for the road.
I asked him a simple question: "Who has the right of way when four cars approach a four-way stop at the same time?" To which he responded: "The guy in the pickup truck with the gun rack and bumper sticker that says 'I gave up anger management.'"
My father, on the other hand, has different plans before year-end. High on his list is to review his investment portfolio. Not exciting, maybe – but it could be profitable. I shared with him seven ideas to consider before year-end. If you're an investor, you'd be wise to consider these, too.
1. Time the sale of your winners.
It's almost always better to pay tax later, rather than sooner. If you're thinking of taking some profits on the winners in your portfolio, consider waiting until January to sell. This will push the payment of your tax bill on the sale to the spring of 2016.
On the other hand, if you have unused or accrued capital losses, consider selling your winners today and offset your capital gains with your allowable capital losses. You can reinvest the proceeds and your new investment will have a higher adjusted cost base (ACB) than your current winners. You get the benefit of this "step-up" in ACB without triggering tax when your capital losses offset your gains.
2. Sell your losers to save tax.
If you've got investments that have dropped in value, consider selling these to realize the capital losses before year-end (place trades by Dec. 24 if you want them to settle in 2014). This makes the most sense if you reported capital gains on your 2013, 2012 or 2011 tax returns. You'll be able to carry your capital losses back up to three years to offset gains in those years and recover taxes you paid. Or perhaps you have capital gains this year that you can apply those capital losses against. Don't jump to sell your losers if you don't have capital gains to offset and you still like the prospects of the investment.
3. Make use of a TFSA.
If you haven't already set up a tax-free savings account, do it before year-end. The ability to contribute starts when you turn 18, so perhaps a child of yours should open an account. The contribution limits were $5,000 per year for 2009 through 2012, and $5,500 for 2013 and 2014, for total contribution room of $31,000 over those years. The TFSA will allow you to grow investments tax-free and withdraw the funds later tax-free as well.
4. Transfer assets to a child.
Giving a child assets before year-end can reduce the value of your estate, saving income tax and probate fees upon your death. If you give them your losing investments, you'll be able to claim the capital losses that are triggered when making the gift, which can save tax. In addition, if your child is an adult, she could sell the assets and contribute to her TFSA or registered retirement savings plan (RRSP) to accelerate her own savings, or pay down debt.
5. Donate securities to charity.
Are you thinking of donating money this year? You'll save more tax by donating some of the winners in your portfolio. Any accrued capital gain on a security that is donated to charity will be eliminated. Not only is the taxable capital gain set to zero, but you'll still be entitled to a donation tax credit to boot.
6. Transfer capital losses to your spouse.
If you have unrealized capital losses but no capital gains this year or in the past three years, consider transferring those losses to your spouse if they have capital gains that can offset the losses.
7. Rebalance your portfolio for tax efficiency.
If the performance of your portfolio has caused certain asset classes to become over- or underweighted, think about rebalancing your portfolio. Don't forget that capital gains and eligible Canadian dividends receive more favourable tax treatment than interest or foreign income. I'm not suggesting that you take on more risk than appropriate, but if you're reinvesting proceeds, think about the tax that will be generated by your portfolio.
Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.