Pay tax-deductible or tax-creditable expenses in 2011: A variety of expenses can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year, including interest expense, investment counsel/management fees, safety deposit box fees, professional dues, spousal support and child-care costs. In addition, expenditures such as charitable donations, political contributions, medical expenses, child fitness program costs, child arts program costs (newly eligible for 2011), tuition fees and transit pass costs that give rise to tax credits must be paid in the year in order to be creditable. If these amounts would otherwise be paid early in 2012, consider paying them by the end of this year, to get the benefit of the tax deduction or credit in 2011 returns.
And remember to keep receipts. Although none are required for electronic filing and only some for paper returns, the CRA randomly requests receipts as part of its post-assessment review.
Review investment portfolio: Year end is a good time for investment portfolio review. You may want to sell loss securities to reduce capital gains realized earlier in the year. If the losses realized exceed gains realized earlier in the year, they can be claimed against net gains in the preceding three years and you will receive the related refund. But keep in mind, if you, your spouse/partner, a corporation that either of you control, your RRSP or your TFSA acquire the same security within 30 days of the sale, the loss will be denied. Moreover, where an RRSP or TFSA acquires the replacement, any tax benefit from the loss is effectively eliminated.
If you have capital loss carryforwards from prior years, you might consider cashing in on some of the winners. By applying unused capital loss carryforwards against 2011 realized gains, the tax cost associated with the gains can be reduced or eliminated.
For all security sales, keep in mind that the trade must settle in 2011 to be considered a 2011 disposition. For Canadian exchanges, the final trade date for 2011 settlement is 23 December, and for US exchanges it’s 27 December.
If you own shares in certain Canadian small business private corporations, you might want to trigger capital gains to benefit from your remaining capital gains exemption (maximum $750,000 lifetime exemption). However, if such shares have declined in value or are worthless, any related loss is a special class of capital loss that can be claimed against any source of income, not just capital gains.
There are a couple of warnings in relation to purchasing investments in December. If you are considering buying bonds or long-term GICs this month (perhaps from the proceeds of security sales), keep in mind that even if the investment pays no interest in 2012, tax will be payable on the interest that accrues to the first-year anniversary date (December 2012) with the 2012 tax return. By delaying the purchase to January 2012, that tax can be deferred one year.
In the case of mutual funds that regularly make distributions near year end, the distribution amount is effectively included in the purchase price and will be taxable in the 2011 return. It might be better to wait until after the distribution to purchase those funds; the cost may be lower and tax will be deferred.
If you’re looking for opportunities to reduce a significant tax liability you expect to have for 2011, you might consider a flow-through share investment before year end. Flow-through shares provide for a current tax deduction roughly equal to the amount of the investment and they may also give rise to federal and provincial tax credits, resulting in significant current tax savings. The deductions and credits reduce the cost base of the investment and, therefore, a capital gain will likely arise when the investment is sold. But before you make the plunge, take note that these investments do carry risks and should be assessed on the merits of the operation and not the tax attributes.
Flow-through shares have often been used in tax donation strategies. However, the 2011 federal budget removed the ability to donate flow-through shares acquired under an agreement entered into or after 22 March 2011 without realizing taxable capital gains. The donation of flow-through shares, which would not be subject to tax, will generally be limited to an amount that is the excess of the value of the shares at the time they are donated over the cost of the shares.
Consider income-splitting loans: The prescribed interest rate applicable to the exemption from income attribution on intra-family loans is still 1% for the final quarter of 2011. That means income-splitting loans are still an excellent tax-saving opportunity for those who have liquid or certain other assets, and are interested in income splitting with spouses/partners and/or children or grandchildren. And for those with outstanding income splitting loans, keep in mind that interest must be paid by 30 January 2012 to avoid income attribution.
Request reduced source deductions: If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting CRA authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for 2011 taxes, in 2012 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2012 tax return is filed.
Make capital acquisitions for business: Self-employed individuals and unincorporated business owners expecting to make capital purchases (such as furniture or equipment) in the near future should consider buying before year end to get a depreciation deduction for 2011.
Consider corporate year-end remuneration strategy: Corporate business owners should make decisions about final remuneration from the company. If there is a plan to pay salary, remember that bonuses can be accrued and be deductible by the company in 2011, but don’t have to be included in the business owner’s personal income until paid in 2012 (the bonus must be paid within 180 days of the company’s year end). This allows for a deferral of tax on salary. And because federal and some provincial corporate tax rates are declining, the tax benefit of the salary deduction to the corporation may be greater in 2011 than it will be next year.
In determining the amount of salary to pay, business owners may want sufficient earned income for 2011 to maximize their 2012 RRSP contribution.
In some cases, paying dividends may be a very tax-efficient way of getting funds out of the company. Capital dividends are completely tax free. Taxable dividends that will generate a dividend refund in the corporation (1/3 of the dividend paid), particularly if they are eligible dividends (subject to a preferential tax rate), can also be paid out with essentially no net tax cost.
And eligible dividend tax rates will be increasing in 2012, so you can achieve tax savings to the extent that you can pay dividends before the end of 2011. To ensure the dividend qualifies as an eligible dividend, the entire dividend must be designated as an eligible dividend when paid.
Age 71?: If you are 71 at the end of the year, your final RRSP contribution must be made no later than 31 December (not 60 days after the end of the year), and an RRSP maturity option must be selected by the end of the year.
Reduce automobile taxable benefit: If you are an employee who uses an employer-provided car primarily for business, you may be eligible for a reduced standby charge (in respect of the availability of the car) and a lower alternate operating benefit, computed as one-half of the standby charge. Update your travel log to determine if you are within the thresholds for reduced benefits and advise your employer in writing before year end in order to have the alternate operating benefit apply.
Contribute to education: Remember to make RESP contributions before the end of the year. With a contribution of $2,500 per child, the federal government will contribute a grant (CESG) of $500, and if you have prior non-contributory years, the annual grant can be as much as $1,000 (in respect of a $5,000 contribution). If you have a child who is 15 this year but have never contributed to an RESP on his or her behalf, 31 December is the last chance to make a contribution and earn a CESG for that child.
Contribute to a TFSA: Make your $5,000 tax-free savings account contributions for 2011. And if you haven’t contributed before, you can contribute up to $15,000 before the end of the year. Remember that you can also fund your spouse’s/partner’s contributions without attracting the attribution rules.
If you’ve withdrawn funds from your TFSA in 2011, keep in mind that the contribution room created by the withdrawal is not available until 2012.
For more information on these and other tax-planning and tax-saving ideas, please call your Ernst & Young professional advisor.
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