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Year-end investment tactics to avoid taking a haircut

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I was at my barber's this past week, getting my hair cut. It's tough to sit in a barber's chair and not overhear the conversation going on next to you. The man next to me was making comments to his barber, Pat, about his recent hair loss. "Pat, my hairline is receding faster than the evening tide," the man said. "Don't think of it as though you're losing more hair," Pat said, "think of it as though you're gaining more face." "Pat, you're not helping me. So, what should I do?" the man asked. "Well," Pat replied, "I think we should shave it off. You know, fire it before it quits."

"I think there should be a 'hair loss tax credit' " the man said. "Not a bad idea," I offered. "You can get tax breaks for losing your capital, why not losing your hair?" Turns out the man is a professional investor. We spent the next 15 minutes talking about year-end strategies for investors. He came to get his hair cut, and walked away with tax advice (and a shaved head). Here's the gist of our conversation.

Place your trades by the deadline for 2011. If you want an investment transaction to take place in 2011, be sure to place your trade on or before Dec. 23. This is the last day for a trade on Canadian markets to ensure that settlement takes place in 2011.

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Consider making TFSA withdrawals before year-end. If you're planning a withdrawal from your tax-free savings account, consider doing so in 2011 rather than early 2012 because amounts withdrawn, although they can be added to your TFSA contribution room, won't be added until the beginning of the calendar year following the withdrawal. Making a withdrawal in 2011, then, will shorten the time until you're allowed to put those dollars back into the TFSA.

Close out option contracts in a loss position. By closing out option contracts in 2011 that have inherent losses you'll be able to use the losses to offset capital gains in the current year or the prior three years.

Defer the sale of securities at a profit until the new year. If you're thinking of selling a security at a profit, waiting until 2012 will postpone the payment of any tax on that capital gain until early 2013, when you file your tax return for 2012.

Claim a capital gains reserve for certain sales this year. If you have sold (or plan to sell) an asset for a profit in 2011 and can structure the deal so that all or part of your sale proceeds are collected after 2011, you may be able to claim a capital gains reserve for part of the capital gain realized. That is, it's possible to spread the tax liability on that gain over a period as long as five years. Speak to a tax pro for details.

Defer the purchase of mutual funds until the new year. If you purchase a mutual fund before year-end you might face tax on some of the taxable income realized in the fund in 2011, even though you may not have been in the fund to reap the benefits of that income earned earlier this year.

Take eligible dividends this year rather than next. If you're a shareholder and have control over the timing of dividends you receive from a corporation, consider taking eligible dividends in 2011 rather than 2012 because the personal tax rate on eligible dividends is due to increase in 2012 (with the exception of Nova Scotia, in certain circumstances).

Pay down non-deductible debt. If you're expecting a bonus or have other cash available, consider paying down non-deductible debt before debt that gives rise to a tax deduction or credit. Paying down debt will provide a rate of return equal to the after-tax interest cost on the debt.

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Continue to deduct interest on investments sold at a loss. If you borrowed money to invest and have subsequently sold the investment at a loss, you can continue to deduct the interest costs provided you reinvest the proceeds of the sale in a new investment.

Donate publicly listed securities to save more tax. If you're thinking of making a charitable donation before year-end, you'll be better off donating a security that has appreciated in value rather than cash. Why? The taxable capital gain on the security will be eliminated if you donate it to charity, providing tax savings over and above the donation tax credit alone.

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About the Author
Author and founder of WaterStreet Family Offices

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices. More

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