Year End Tax Saving Strategies For Canadians
While paying tax on income is inevitable, CRA has provided legitimate ways to reduce your tax and increase your tax refund if you have eligible expenses. So, play by the income tax rules legally and enjoy more money in your pocket.
We have listed down key year-end strategies which will help in increasing your tax refund by either reducing the taxable income (such as tax loss selling) or increasing the available non-refundable tax credits (such as pre-payment of certain expenses by Dec 31).
Profile of each taxpayer is different depending on age, marital status and other factors. You should review each strategy as per your profile and implement as per your judgment. If you are not sure about benefits of certain tax saving strategy, you should consult a tax professional. fastneasytax.com is not responsible for any
loss due to implementation of these strategies. You can estimate
your taxes quickly using our free income tax calculator.
Tax Loss Selling
Tax-loss selling involves selling investments with accrued losses at year end to offset capital gains realized elsewhere in your portfolio for the same year. Any capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset capital gains in other years. If you forgot to carry back losses for previous 3 years, you can do it later by filing a modified tax return for previous year. The more capital gains tax you paid in the last three years, the more you should consider the tax advantages of tax loss selling before the end of the year, so you can carry back the losses and get a refund of the capital gains tax you paid in prior years. Due to Canada’s strengthening dollar, securities you purchased in a foreign currency may actually be in an accrued loss position once you take the foreign exchange component into account.
For most publically traded securities, sales and purchases must take place on or before December 24 to settle by December 31.
Superficial loss : If you plan to repurchase a security you sold at a loss, beware of the superficial loss rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date. The rules also apply if property is repurchased within 30 days and is still held on the 30th day by your spouse (or partner), by a corporation controlled by you or your spouse, or by a trust of which you or your spouse are a majority beneficiary (such as your RRSP or TFSA). Under the rules, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means the benefit of the capital loss can only be obtained when the repurchased security is sold.
Steps to follow :
- Review your asset sales for the year to determine your net capital gain/loss position.
- Consider selling investments with accrued losses before the end of the year (by Dec 24) to offset capital gains realized in the current or previous 3 years.
- Consider selling mutual funds before year end to minimize your allocation of taxable income for the tax year as most mutual funds distribute income and capital gains once a year, normally during December.
Payments due by Dec 31
Tax year in Canada runs from Jan to Dec. You report all your income and expenses for the tax year. There are some exceptions to few expenses which can be carried forward and claimed in a later tax year than the year in which they were paid.
To help you decide whether you should pay the expense in Dec or wait till next year, we strongly suggest you to estimate your tax refund by creating an account and entering your data. This is already Dec and you know your annual income minus pay of December. You can estimate your December pay and get an estimated refund or balance owing.
Once you know the estimate, you can play around with these optional deduction and credits and decide if you would like to pay them by Dec 31 OR pay them in new year. Paying by Dec 31 will allow claiming the tax benefits for tax year. If there is no tax benefit for tax year, you might be better off delaying the payments by early next year and use the tax benefit for next tax year.
You can use this strategy for only those expenses where you have the flexibility to pay in Dec or in early next year. We have classified the expenses in two categories : one is income tax deduction and other is non-refundable tax credits. Deduction reduces your taxable income and might move you to a lower tax bracket resulting in more tax saving. Non-refundable tax credits provide tax credit at the lowest applicable tax rate (with one exception for donation tax credit : you can get donation tax credit at maximum applicable rate for donation greater than 200).
Deductions for year end tax strategies
- Investment expense: Applicable to you if you have investments (such as stocks, mutual funds, bonds etc.) in a non-registered portfolio. If you pay an investment advisor to manage your non-registered investment portfolio or you have borrowed money to make investments in this portfolio, you can claim your investment expenses on line 221 (enter in Deduction tab under investment expenses), reduce your taxable income and move to a lower tax bracket, if possible. You can claim only those expenses for tax year which have been paid by Dec 31 of tax year. Investment expense can’t be carried forward.
- Child care expense: If you or your spouse have paid for someone to look after your child (under 16 years of age or with an impairment in mental or physical function) so that one of you could earn income, go to school, or conduct research in 2013, you can claim those child care expenses as deduction on line 214. Generally, only the spouse with the lower net income (even if it is zero) can claim these expenses. These expenses can’t be carried forward. So, if you can’t use all the expenses paid in the year for maximum tax benefit and you have the option to defer December payment to next year, you should consider exercising the option.
- Moving expense: If you moved to work or to run a business or to study as full time student at an educational institution and you moved at least 40 km closer to your new work or school, you can claim moving expenses as deduction against the net eligible income at new location. You have the liberty to carry forward the moving expenses paid to next tax year if you do not have enough eligible income to use all your deduction. Paying by Dec 31 will allow you to claim the tax deduction benefits in tax year. Any unused moving expenses can be used in next tax year.
Credits for year end tax strategies
- Charitable donations: December 31 is the last day to make a donation and get a tax receipt for current tax year. However, you can carry forward your tax donation to 5 years and claim in any of those years. If your estimated tax refund doesn’t provide any tax benefit for current tax year, you should defer and make the donation in January to avail the benefits later.
- Medical expense: You can claim medical expenses for any 12 month period ending in current tax year as long as same expense has not been claimed. Paying by Dec 31 will give you the option to use the medical expense for current tax year by selecting Jan to Dec as your 12 month period. If you select some other 12 month period, you can claim Dec expenses in next tax year.
- Political contribution: These contributions can’t be carried forward. So, if you can’t use the extra credit to reduce your tax owing, you might want to defer the contribution till new year for tax benefit purpose. You can claim the lesser of tax owing or credit based on contribution.
- Interest on student loan: You can carry forward the interest paid on student loans to next five years. Five year is counted from the year when you make the payment. If your estimated refund doesn’t provide any tax benefit for current tax year by making the interest payment on student loans, you should defer and make the payment in January to avail the benefits later.
Reduce tax deduction at source
We are not a big fan of huge tax refund during tax season. It simply means that you have given interest free loan to government for one full year. We strongly encourage you to act now and request lower withholding tax at source by completing form T1213. There is a separate variance of form T1213 (OAS) which can be used by seniors to reduce old age security recovery tax at source. The deductions and non-refundable credits, which can reduce your tax burden, can include RRSP contributions, medical expenses, public transit amount, homebuyer amount, child care expenses, employment expenses, interest expense on investment loans, carrying charges, charitable donations and many more. Request your income provider to reduce withholding tax based on CRA authorization.
Defer activities to new year
Similar to prepayment option by Dec 31, it pays to defer some activities to new year and delay payment of taxes on those activities by another year. We have listed mostly used activities below.
- GICs and Other Debt Certificates: If you’re thinking of purchasing a one year GIC towards the end of year, you may want to consider delaying the purchase to early next year to defer the recognition of the income to a year later.
- Mutual fund purchases: Many mutual funds (and most equity funds) distribute income and capital gains once a year, during December. If you purchase units of these funds just prior to a distribution, you will be allocated a full share of the mutual fund’s income and gains for that year. Consider delaying the purchase until after this distribution has been made to avoid being allocated the full year of income. Deferring the purchase until after the mutual fund distribution will ensure that you won’t be allocated taxable income for current tax year.
- Selling securities with accrued capital gains: This is opposite of tax loss selling. Delay selling securities with accrued capital gains until next year and you can defer the tax payment on those gains by another year.
- RRSP Home Buyer’s plan(HBP) withdrawals: HBP allows qualified taxpayers to withdraw up to $25,000 tax-free from your RRSP towards the purchase of a principal residence. If you’re planning on using the HBP towards year-end, consider deferring your withdrawal until after December 31. This will extend your time period for purchasing your home and repaying the amounts withdrawn by one year.