As we close in on December, it’s a great time to look for ways to minimize tax liability. Once the calendar turns over to January – it is too late, except for contributing to your RRSP in the first 60 days of 2021.
For starters, take stock of medical bills and any charitable donations. Unclaimed charitable donations made by a taxpayer and spouse/common law partner within the current and previous five years can be grouped and claimed in the current year…although limits apply. In this year of Covid-19, while there are limits to medical deductions (cannot exceed the lesser of $2,352 or 3% of net income), you can group expenses for children and spouses as long as they don’t exceed this amount. Medical expenses of dependant relatives that exceed this amount may also be claimed by the individual. You may transfer high-value securities to your favourite charity for a legal “double-dip” because no taxes are paid on the capital gain and a tax credit is claimable for the value of the transfer.
If working from home this year, perhaps your 2021 income could be lower.
If self-employed or up for a bonus, try to delay any extra income to the new year for further tax deferral. In some cases, your 2021 income may even be lower due to retirement or the effects of C-19 slowdowns.
Review non-registered investment accounts and determine any capital gains realized in the current year or previous three years. If so, you may also have some losses to offset these. Losses can be carried back up to three years and forward indefinitely.
Use any proceeds from tax-loss selling to pay off non-tax deducible loans if possible. You could then borrow back money to reinvest and claim the interest costs as a tax deduction assuming your time horizon and risk tolerance allows for this strategy. At the very least, reinvest proceeds inside your TFSA if room allows recalling that in January you will pick up at least another $6,000 of TFSA room.
If you are a business owner, consider purchasing needed equipment before year-end so that the deductions or capital cost can be applied in this current year. Why postpone buying equipment to January when it could be bought in December and the tax benefits utilized now.
Income splitting is another tool used by business owners and even with the recent “Tax On Split Income” (TOSI) rules, there are opportunities. A spousal loan can also be of great value when you have a couple with widely differing income levels. So are Flow-Through Limited Partnership Resource Funds which are fully tax-deductible.
As always, it’s best to consult a qualified accountant or financial planner who can assist with the above should you need help – but do so before year-end.
To all readers…Best Wishes for a wonderful Christmas season along with Health, Happiness and of course Prosperity in 2021.
Michael Prittie, CFP, CIM FCSI, CIWM is a Portfolio Manager and Branch Manager with Mandeville Private Client Inc/Capital Wealth Partners in Ottawa.
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