Every once in a while, I take the time to ask my kids what they’re learning in school since I’m paying for most of their university education, and I want to make sure I’m getting my money’s worth.
“Sarah, what have you been learning in school?” I asked. “Well Dad, this week I learned that the world’s largest turkey weighed 86 pounds and was the size of a German shepherd, Life magazine was the first to make $100-million per year selling ad space and, if a monkey steals your ball while golfing in the Kingdom of Tonga, there’s no penalty,” she replied. I was impressed.
Sarah has also been taking a tax course, and has been learning that year-end tax planning can save investors significant dollars. So I shared with her the top 10 year-end ideas for investors. Here they are:
Observe investment deadlines. If you hope to sell an investment at a loss in 2019 to offset the loss against capital gains, the settlement date – not the trade date – is what matters. To ensure that your transaction settles in 2019, place any trades on or before Dec. 24, 2019.
Review your outstanding debt. If you have debt where you’re incurring non-deductible interest, consider liquidating some of your investments outside of your registered plans (count the tax cost first) and use the proceeds to pay down the debt. Then re-borrow to replace your investments. This can create interest deductibility for 2020 since you’ll be borrowing to earn income.
Time the purchase of certain investments. Are you looking to invest in an interest-bearing security, such as a guaranteed investment certificate (GIC), that has a maturity of one year or longer? If so, consider waiting until the new year. Why? You won’t have to pay tax on any accrued interest until 2021 – the year of the first anniversary of the investment. Also, consider waiting until early in 2020 to purchase mutual funds that are expected to make taxable distributions before the end of 2019. You’d hate to pay taxes sooner than necessary.
Trigger accrued losses before year-end. Have you realized capital gains this year, or in one of the three prior years (2016, 2017 or 2018)? If so, consider selling any investments that have dropped in value so that you can apply those losses against the capital gains. Losses must be applied to the current year first, then can be carried back up to three years or forward indefinitely.
Trigger capital gains in some cases. You might consider triggering capital gains before year-end if it won’t result in a tax bill (perhaps because you have capital losses to use up, or the gain will be taxed in the hands of someone with little income). You can then reinvest those proceeds, which will provide you with a new, higher, adjusted cost base (ACB). A higher ACB means less tax later when you ultimately sell the investment.
Give investments to a child. Consider transferring investments to a child before year-end where that investment has dropped in value. This will trigger a capital loss that you can use to offset capital gains. Any future growth in the investment will then be taxed in the hands of your child – not yours.
Donate securities to charity. Making a donation by year-end will provide you with tax savings for 2019. And you’ll do well to donate eligible securities that have appreciated in value since our tax law will eliminate the taxable capital gain on these securities, in addition to providing the tax relief for the donation itself – a double benefit.
Contribute to your RRSP. You have until Feb. 29, 2020, to make a registered retirement savings plan contribution that will provide a tax deduction in 2019. But why not make that contribution sooner to get the money working for you as soon as possible? Even if you aren’t sure what to invest in, you can make your contribution and park it in cash until you’ve decided.
Withdraw in a low-income year. If your income in 2019 is exceptionally low, you might consider withdrawing funds from your RRSP or registered retirement income fund (RRIF) if you need the funds to meet costs of living in the near future.
Convert to a RRIF before year-end. You’re entitled to a pension credit that can fully or partly offset the tax on the first $2,000 of eligible pension income annually, which includes withdrawals from a RRIF if you’re 65 or older in the year. Consider setting up a RRIF before year-end to pay out just $2,000 annually to take advantage of this credit if you don’t have any other eligible pension income.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.