My friend Paul has a procrastination problem. He lives by the mantra: "The sooner I fall behind, the more time I have to catch up." He insists that one of these days he's going to do something about his procrastinating – but he hasn't gotten around to it yet. I was talking to Paul this week about his tax planning and, as you'd expect, he hasn't thought about his planning for 2015. Although the end of the year is in sight, there are still some things Canadians can consider doing before year-end to save tax. I want to share a few of these things with you now.
Investor tax-loss nuances
I've already devoted time to writing about capital losses (see my articles dated Oct. 11 and Oct. 15, 2015) but there's another point worth mentioning. First, given the direction of the Canadian dollar over the past two years, you might be surprised that your capital losses could actually be capital gains. There are many examples in which folks have realized losses on the sale of U.S.-dollar-denominated securities, but when converting the transactions to Canadian dollars, they've actually realized capital gains. So, do the math on the foreign currency gains or losses before selling a security in the hopes of realizing capital losses to use this year.
Example: William owns 100 shares of a U.S. company, which he purchased in 2013 when the Canadian dollar was on par with the U.S. dollar. He paid $10,000 (U.S.) for the shares ($100 a share). Since that time, the shares have dropped in value to $8,500 ($85 a share) and William has decided to sell the shares so that he can claim his capital loss this year against capital gains. The problem? William thinks he has a capital loss, but he doesn't. When William sells the shares, he'll have to convert the sale proceeds to Canadian dollars at the exchange rate in effect on the date of the sale, which today is, say, $1.31 (Canadian) = $1.00 (U.S.). So, his sale proceeds are actually $11,135 (Canadian) ($8,500 x 1.31). Since his cost amount is $10,000 (Canadian), William has a capital gain of $1,135 ($11,135 less his cost of $10,000) to report on his Canadian tax return.
To figure out what portion of this gain represents foreign currency gains, William can do the math using three steps.
Step 1: He will calculate his gain or loss using the historical exchange rate only. In this case, his cost in Canadian dollars is $10,000 (using the historical exchange rate at the time of his purchase), and the sale proceeds using the same historical rate ($1.00 Canadian = $1.00 U.S.) would be $8,500. This results in a loss of $1,500 ($10,000 less $8,500) assuming the same exchange rate at the time of purchase and sale.
Step 2: Calculate the gain or loss using the current exchange rate for the sale. We did this above. The result was a capital gain of $1,135 (Proceeds of $11,135 less his cost of $10,000).
Step 3: Take the difference between the answers in steps 1 and 2, and this will be your foreign currency gain (or loss). In this case, the difference is $2,635 [the difference between a negative number $1,500 (a loss) in step 1, and the positive number $1,135 (a gain) from step 2]. Conclusion: William realized a capital loss of $1,500 but a foreign currency gain of $2,635, for a net capital gain of $1,135.
Tax-free saving accounts
A couple of points are worth noting here. First, if you're planning to withdraw funds from your TFSA soon, consider making the withdrawal by Dec. 31, 2015, rather than waiting until early in 2016. Why? When you make TFSA withdrawals, you're permitted to recontribute the same amount starting in the following calendar year. If you recontribute in the year of your withdrawal without having sufficient contribution room, you could face penalties. If you wait until, say, January, 2016, to make a withdrawal, you won't be provided that recontribution room until 2017. But if you make the withdrawal in December, 2015, you'll be given that recontribution room in 2016 – allowing you to make recontributions potentially a year earlier.
Finally, if you've been 18 years of age since 2009, you can contribute up to $41,000 to a TFSA in 2015 if you haven't contributed before (based on today's rules). As a reminder, the Liberals did propose to cancel the increase to TFSA contribution limits, putting the limit back to $5,500. If this is done retroactively, the total permitted contributions to a TFSA as of 2015 will be $36,500. Consider making a contribution today to begin taking advantage of tax-free growth inside the plan.
Retirees make an advance contribution
If you turned 71 in 2015, you have to wind up your RRSP by year-end. If you also have earned income this year, which will provide you with RRSP contribution room in 2016, consider making that 2016 contribution in December of this year before winding up your RRSP forever. You'll face a small overcontribution penalty for the month of December, 2015, only, but you'll be entitled to a tax deduction in 2016 for the contribution you made in December, 2015, and this deduction will save you more tax dollars.
Contribute to a spousal RRSP
Contribute to a spousal RRSP before year-end to effectively reduce the length of time that must pass before your spouse can make withdrawals without at least part of the withdrawal facing tax in your hands. For example: If you contribute by year-end, your spouse can make a withdrawal of those dollars on Jan. 1, 2018, at the earliest without the withdrawal being taxed in your hands. If you wait until January, 2016, to contribute, your spouse will have to wait until 2019 before making a withdrawal and avoiding attribution back to you.
You might recall that the 2015 federal budget reduced the minimum required withdrawal from RRIFs for 2015 and later years. The new minimum withdrawal requirement starts at 5.28 per cent of your RRIF balance on Jan. 1 if you're age 71 (compared to the old rate of 7.38 per cent), and rises to 18.79 per cent at age 94 (the factor is unchanged at 20 per cent for those over age 94). If you withdraw more than the required minimum in 2015, you'll be able to recontribute the excess until Feb. 29, 2016, and the amount you re-contribute is deductible in 2015.
I'll provide more year-end tax tips for families, employees, students and others next time. Stay tuned.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.